Halliburton Co.'s (NYSE:HAL) purchase of Baker Hughes (NYSE:BHI) for about $35 billion is designed to cuts costs for the combined companies and help them dominate hydraulic fracturing in North America. It also could make the new Halliburton surpass Schlumberger Ltd. (NYSE:SLB) as the global market leader in oilfield services.
This transaction came about because of the current fall in in the price of crude oil and the rise in the cost of extracting it. Wedding the two companies would eliminate redundancies, and therefore costs, allowing a new Halliburton to offer its customers lower prices, according to executives at both companies.
At the same time the deal would give Halliburton two products it lacks now; chemicals and pumps that increase output from oil and gas wells.
If Halliburton's purchase of Baker Hughes is approved, the combination could become the largest oil field services company in the world. Schlumberger, the current leader, had revenue of $45.3 billion in 2013. By contrast, Halliburton's and Baker Hughes' combined revenue for last year was $51.8 billion. Dave Lesar, who is Halliburton's chairman and CEO and would remain in the position if the merger is approved, said during a conference call on Nov. 17, when the deal was announced, that combining the two companies will mean great savings for hydraulic fracturing in North America.
"The integration teams are moving rapidly," Lesar said. "In particular in hydraulic fracturing, where we can our combine logistics networks."
The deal also would open up new competitive advantages for Halliburton in drilling projects in other parts of the world where Schlumberger now dominates. Until now, Halliburton, Baker Hughes and Schlumberger "have been in a knife fight the past few years" for business in these areas, according to a statement from analysts at the investment banking firm Tudor, Pickering Holt & Co.
Lowering the costs of oil field services could help revive exploration worldwide. Oil prices on average have fallen from more than $100 per barrel in the spring to their current level of below $75 per barrel, and there are no signs that they'll pick up any time soon. As a result big and small oil companies are cutting back on exploration and extraction projects because their profit margins are shrinking.
Despite the benefits of a merger for both Halliburton and Baker Hughes, negotiations on the deal were reportedly extremely difficult. The talks, which began Oct. 11, reached a low point on Nov. 14 after Baker Hughes' board rejected Halliburton's initial offer and Halliburton responded by threatening to replace the Baker Hughes board altogether.
The two sides finally agreed to Halliburton's offer of $80.69 per share of Baker Hughes stock, based on the value at the close of stock trading on Nov. 14. That offer looked more generous after the weekend: On Monday, Nov. 17, Baker Hughes opened at $65.40.
The merger still must pass regulatory muster, which isn't a given because Halliburton and Baker Hughes are the United States' second- and third-largest oil services companies. If regulators insist, Halliburton said it is prepared to sell off subsidiaries that earn the company as much as $7.5 billion a year. And if regulators reject the merger, Halliburton would pay a $3.5 billion fee to Baker Hughes.
By Andy Tully of Oilprice.com. Oilprice has no position in any stocks mentioned. The Motley Fool recommends Halliburton. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.