BHI and HAL shareholders have differing perspectives on merger

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The Baker Hughes and Halliburton deal

On November 13, Baker Hughes (BHI) disclosed that it was engaged with Halliburton (HAL) for a preliminary discussion regarding a potential business combination. Subsequently, on November 17, HAL and BHI reached an agreement to go ahead with the transaction. The agreement received approval from both companies’ board of directors.

In the press release, BHI also disclosed that the transaction is not yet certain, as it is subject to a number of regulatory approvals.

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Baker Hughes shareholders show positive response to the deal

As the chart above shows, BHI shareholders have been excited about HAL’s offer to combine the company. On November 13, the day the preliminary discussion started, BHI’s shares went up 15.2% from the previous day’s close. On November 17, the day the companies reached an agreement, BHI stock rallied 8.9% from the November 16 share price. Overall, from November 12 to November 16, shareholders saw a 28% growth in wealth from BHI shares.

However, BHI’s share price of $65.23 on November 17 still falls short of the ~$78 value its shareholders will receive if the deal completes. This indicates the market’s doubt over the success of the deal, or an arbitrage opportunity for those with conviction that the deal will complete.

The proposed merger at 40.6% premium is one of the highest in the past two decades for US-based companies and for a deal this size.

HAL shares down

HAL’s shareholders, although initially sending positive signals about the transaction, were subdued after the details of the transaction came out. On November 13, HAL’s shares went up 1.1%. But on November 17, the stock slumped 10.6% from the previous day’s close. From November 12 to November 17, HAL’s shares lost 7.5%.

This reflects the market’s perception that HAL overpaid on the deal. In addition, a 10% break-up fee clause on the deal value is approximately three times the typical amount for a deal this size, which raises HAL’s risk if the deal fails to go through. Read more about the break-up fee in Part 9 of this series.

Other oilfield service companies’ shares

From November 12 to November 17, Schlumberger’s shares declined 1.8%, while Weatherford International’s (WFT) shares surged 6.7% during the same period, signaling a trend that consolidation in the industry could be beneficial to shareholders of the smaller companies like WFT. All these companies are components of VanEck Vectors Oil Services ETF (OIH).

How are HAL’s and BHI’s operations integrated geographically? Read the following two sections to find out what the merger between these companies would mean for revenues and profits.

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