Halliburton lays out why its massive merger with Baker Hughes was doomed

Halliburton and Baker Hughes tried to get together, but couldn’t.

On Sunday, they announced that they were scrapping their $28 billion merger after it faced strong scrutiny from US and European regulators.

The authorities were concerned that both companies — the world’s second- and third-largest oilfield services companies respectively — would stifle competition in their industry.

But in addition to regulatory concerns, there was another somewhat obvious reason why the deal was already doomed: the oil crash.

With the oil crash, it would have been hard to justify the economics of the merger to shareholders.

Baker Hughes was worth $34.6 billion when the deal was first announced in November 2014. By the time the deal was canceled, it was valued at $28 billion.

During Halliburton’s earnings call on Tuesday, CEO Dave Lesar explained more on why the economics simply couldn’t work out (emphasis ours):

In addition to regulatory manners, the unprecedented deterioration of the oil and gas industry decimated the economics of the deal. During the pendency of the deal, the WTI price of oil has gone from over $76 in November of 2014, to a low of just over $26 in February of this year, while the global rig count rig has gone to a 17 year low and you all know what has happened in North America, where each week we’ve seem to hit new historical lows.

As a consequence, the aggregate quarterly revenues of Baker Hughes have decreased nearly 60% from $6.6 billion for fourth quarter 2014, to $2.7 billion for first quarter of this year.

Given the abrupt and deep downturn in the oil services market, we were unable to obtain adequate value for the businesses we proposed to divest. This, coupled with the decline in each company’s business, eroded the expected synergies and accretive aspects of the transaction, including the timeline to integrate the businesses to levels which we believe severely undermine the originally anticipated synergy benefits of the deal.

As a result, it became clear that continuing to pursue the transaction was no longer in the best interest of our stockholders, despite having to pay the [$3.5 billion] termination fee to Baker Hughes. Moving forward with the transaction did not make sense in light of the elongated regulatory scrutiny, the projected timelines for closing the transaction, the poor deal economics and the current market environment.

It’s quite self-explanatory. Bloomberg wrote that Lesar saw the deal as the best way to survive the oil downturn, which began mid-2014.

Still, it’s unclear whether Halliburton would have considered the anti-trust pushback worth fighting against to the end if there had been no oil crash.

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