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Exploring the DOJ’s Key Objections to the HAL-BHI Deal

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Apr. 7 2016, Published 3:46 p.m. ET

Baker Hughes–Halliburton offers similar services

The U.S. Department of Justice’s (or DOJ) legal move toward blocking the proposed acquisition of Baker Hughes (BHI) by Halliburton (HAL) is based on the two companies’ possible violation of the prevailing competition laws.

Halliburton and Baker Hughes offer a wide spectrum of products and services to the upstream oil and natural gas industry throughout the life cycle of the reservoir. Their key segments are as follows:

  • Completion and Production
  • Drilling and Evaluation
  • BHI-operated Industrial Services segment, which caters to the downstream chemicals industry

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DOJ’s key objections and the markets affected by the BHI-HAL deal

Below are the key markets in which Halliburton and Baker Hughes, along with Schlumberger (SLB), exercise substantial market share. According to the DOJ, a merged entity would drastically lessen completion. This could lead to the Market’s being controlled by only a handful players, which in turn could lead to price manipulation. The key markets are:

  • Onshore Logging While Drilling Services: According to the DOJ, the BHI-HAL combined entity would hold a 59% share of this market. In 2014, the market had total revenue of $350 million.
  • Fixed Cutter Drill Bits: The BHI-HAL combined entity would hold a 52% share of this market. In 2013, the market had total revenue of $1.4 billion.
  • Offshore Liner Hanger Systems and Services: The BHI-HAL combined entity would hold an 84% share of this market. In 2014, the market had total revenue of $150 million.
  • Offshore Production Packers and Services: The BHI-HAL combined entity would hold a 75% share of this market. In 2014, the market had total revenue of $100 million.
  • Onshore Cementing Services: The BHI-HAL combined entity would hold a 45% share of this market. In 2014, the market had total revenue of $4 billion.
  • Onshore Liner Hanger Systems and Services: The BHI-HAL combined entity would hold a 72% share of this market. In 2014, the market had total revenue of $400 million.

Is Halliburton’s proposed asset sale enough for the DOJ?

In order to adhere to competition laws, Halliburton proposed the divestment of a mix of assets or certain business lines of the two companies. HAL agreed to sell assets that generated $7.5 billion in revenue in 2013. It later agreed to increase this amount to $10 billion.

Although HAL scouted a suitable buyer for its assets, there was no concrete proposal from any potential buyer. Halliburton makes up 0.17% of the SPDR S&P 500 ETF (SPY). It also makes up 0.17% of the iShares Core S&P 500 ETF (IVV).

According to the DOJ’s complaint, “The proposed divestitures would not include full business units but rather would be limited to certain assets.” So, Halliburton is likely to retain its more valuable assets even after a sell-off.

The complaint further alleges that this divestiture would not replicate the substantial competition between the two rivals that exists today. Read more about Halliburton in Halliburton’s Challenges before the Oil Recovery Begins.

Next, let’s discuss the latest Wall Street analysts’ recommendations for these two stocks.

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