The pending merger between Halliburton and Baker Hughes promises to be one of the most highly scrutinized corporate combinations in the history of the oil and gas industry. Not only will the deal create, by some metrics, the largest provider of oilfield products and services in the world, it will irrevocably alter the balance of power for a customer base accustomed to long-standing rivalry among its largest suppliers.
Notwithstanding Halliburton CEO Dave Lesar’s contention that initial customer feedback regarding the deal was unanimously positive, customers have a right to be concerned any time two competitors of this size merge. Transformational transactions tend be troublesome for both shareholders and customers, and we suspect this deal could present its fair share of challenges.
Anti-trust issues will almost certainly limit the fusing of certain product and service lines in categories and regions where combined market shares are deemed excessive by regulators. The assumed saftey net for customers is that, to address regulators’ concerns, certain assets will be sold to other suppliers — some of whom may represent new entrants to the space.
The deal’s duration might also prove problematic. The transaction is not expected to close until the second half of 2015. Once closed, another 18 to 24 months will be needed to implement headcount reductions, restructuring plans and other initiatives. This suggests a potential three-year window for Schlumberger, Weatherford and other competitors to adjust their own organizations, court impatient and/or skeptical customers, or otherwise exploit the situation.
If Baker Hughes’ customers can expect to be propositioned early and often by competing suppliers, its employees will be downright celebrities. Although the current weakness in commodity prices might provide some cover from mass defections to competitors eager to snatch up members of Baker Hughes’ well-trained and highly respected workforce, retaining employees once the cycle turns up will likely prove a challenge.
To its credit, Halliburton management seems eager to prove it can execute on its aggressive financial targets and integration plans. In fact, it has stated that it’s prepared to sell up to $7.5 billion in assets should it be required to do so by regulators. It has also agreed pay a hefty $3.5 billion breakup fee (yikes!) should the deal fail to receive regulatory approval.
The large premium being paid by Halliburton will require $2 billion in annual cost reductions, half of which are expected to come from operations (the heart any business). To make sure these cuts get done, the company has taken the extraordinary step of reassigning CFO Mark McCullom to head the massive integration of the two companies. Were not sure what this says about managements’ priorities or the deal’s drivers, but it’s hard to imagine customers not being significantly impacted both during and coming out of the process.