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Drilling down

17 Nov 2014 By Kevin Allison

The Baker Hughes chief executive must be feeling satisfied. Martin Craighead played hard-to-get and it helped his company squeeze a premium north of 50 percent out of Halliburton, which on Monday agreed to acquire its smaller U.S. oilfield services rival for about $35 billion in cash and stock. Halliburton’s $2 billion annual cost savings goal covers the premium, but only just – and the benefits may fall short of that target.

Halliburton CEOs have been eyeing Baker Hughes at least since Dick Cheney held the reins in the 1990s. The Texas-sized price tag means, however, that current boss David Lesar has his work cut out. Taxed at 30 percent and discounted to arrive at a present value, the hoped-for savings should be worth about $14 billion. That’s a hair more than the premium Halliburton is paying over Baker Hughes’ undisturbed $22 billion market value.

The synergy figure looks ambitious, though. Equivalent to nearly 8 percent of Baker Hughes’ expected revenue next year, it is well above the 4 percent to 6.5 percent of the target’s sales in other recent oilfield services deals.

One problem could be antitrust scrutiny. The deal would leave the enlarged Halliburton and $122 billion sector-leader Schlumberger as the only big competitors in a handful of important markets. Halliburton says it’s willing to shed businesses with up to $7.5 billion of revenue to satisfy regulators. It has committed to paying a whopping $3.5 billion break fee if trustbusters derail the deal. But anything the company has to sell beyond what’s already planned will reduce the scope for cost savings.

Then there is integration. The two Houston-based companies are fierce competitors, and even in the smoothest mergers it isn’t easy to get two companies to gel. Halliburton’s threat to replace all the Baker Hughes directors – withdrawn once a deal was struck – may have been a negotiating move but it still smacks of hardball. There’s scope for debilitating culture clashes.

Scale should be a big advantage. But the uncertainties combined with the high price tag help explain the 9 percent drop in Halliburton’s shares by midday on Monday in New York. Investors aren’t fully convinced the deal will happen, either – Baker Hughes stock was trading well short of the deal value. But it was still up 30 percent from last week before news reports of the merger emerged. It looks like a tactical win for the target’s shareholders.


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