By Russell Gold And Angela Chen
Shares of Halliburton Co. dropped sharply Monday after the
company said it would buy Baker Hughes Inc. in a $34.6 billion
stock-and-cash deal to combine two of the world's largest oil-field
services companies.
Investors reacted negatively to the price Halliburton is paying
for its smaller rival. Halliburton's offer of $78.62 a share is 47%
above where shares of Baker Hughes closed on Wednesday. The stock
climbed Thursday when The Wall Street Journal reported that the
companies were in talks.
Halliburton shares were down 9.6% Monday afternoon at $49.81.
Baker Hughes shares were up 10% at $65.89.
Analysts also raised concerns about the $3.5 billion breakup fee
Halliburton agreed to pay if the deal collapses over antitrust
issues. The two companies have many overlapping businesses, such as
computer-controlled horizontal drilling and hydraulic fracturing of
oil and gas wells. They also drill in many of the same regions,
from U.S. shale fields in Texas and North Dakota to the deep waters
off the coast of Brazil.
Halliburton Chief Executive Dave Lesar said he was ready to
fight for regulatory approval. "We have the very best in antitrust
counsel," he said. "We are prepared to be cooperative with
regulatory authorities." If required by regulators, Halliburton
said it would sell businesses that generate up to $7.5 billion in
revenue.
The deal, which would help the companies contend with falling
oil prices, came after weeks of discussions that at one point
turned hostile. The companies didn't say how the deal was sealed
over the weekend, but Halliburton appeared to have sweetened its
offer.
"We bargained hard with each other and at the end we got a deal
that is good for the shareholders," Mr. Lesar said.
Baker Hughes Chief Executive Martin Craighead said combining the
companies would be good for customers. "I see the potential to have
the best oil-field services company that has ever existed, full
stop," he said.
With the deal's completion, which is expected in the second half
of next year, Baker Hughes shareholders would own about 36% of the
combined company. The new company, to keep the Halliburton name,
will have a combined board of 15 members, including three from the
Baker Hughes board.
Achieving a friendly agreement was important for a deal that is
likely to face antitrust scrutiny. Skeptical regulators can be
harder to win over without a willing merger partner eager to
persuade the government to bless the deal.
The companies face a world where drilling for oil and gas has
become increasingly expensive and competitive---and falling crude
prices are only adding to the pressures on oil-field services
companies. Industry experts said those trends likely spurred
Halliburton to approach its smaller rival.
Exploration around the globe is starting to contract. Big or
small, some energy companies are demanding lower prices from their
oil-field servicers as crude fallen from over $100 a barrel to
under $75 and show no signs of a quick rebound.
Combining the companies would create a new oil-field services
giant that can offer lower prices to customers, executives from
both companies told analysts Monday.
Mr. Lesar said fracking in North America would be a key area
where the combination of the two companies would result in big
savings. "The integration teams are moving rapidly," Mr. Lesar
said. "In particular in hydraulic fracturing, where we can our
combine logistics networks."
A takeover of Baker Hughes would create a global company better
able to compete with Schlumberger Ltd. for huge overseas projects.
The three companies "have been in a knife fight the past few
years," analysts at Tudor, Pickering Holt & Co. said.
The merger would bring together two companies that have competed
against each other for a century. Baker Hughes traces its corporate
roots to 1907, when Rueben C. Baker formed a company in the
California oil fields to sell the drilling tools he invested.
In 1919, Erle Halliburton founded a company that focused on
cementing---an important phase in drilling and finishing wells---in
Oklahoma. Schlumberger, Halliburton and Baker Hughes are often
referred to as the Big Three" in oil-field services, with
Schlumberger by far the largest. All three operate globally.
With global companies trimming their spending, and U.S.
companies "about to confront a very hard landing, major
consolidation in the oil-service sector has become an imperative,"
said Bill Herbert, managing director of Simmons & Co.
International, an investment bank for the energy industry.
Relations between Halliburton and Baker Hughes turned hostile
last week, and what transpired in the preceding month of
discussions was a point of contention between the companies.
Mr. Lesar dismissed concerns about antagonism between the
competitors, both of which are based in Houston. "There is always a
bit of theater when these things come together," he said.
The companies last year had combined revenue of $51.8 billion,
more than 136,000 employees and operations in more than 80
countries.
Halliburton intends to finance the cash portion of the
acquisition through a combination of cash on hand and debt
financing.
--Dan Molinski contributed to this article.
Write to Russell Gold at russell.gold@wsj.com and Angela Chen at
angela.chen@dowjones.com
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