When Halliburton (NYSE:HAL) agreed to a deal to buy rival Baker Hughes (NYSE:BHI) in late 2014, it knew that the transaction wouldn't be an easy sell to regulators. That said, it wouldn't have approached its rival in the first place if it didn't think it could come up with the right combination of assets sales to appease regulators. However, with the transaction now entering its second year of limbo after another extension giving it until the end of next April, the possibility continues to grow that the merger might never get closed. That's because the companies still have yet to convince U.S. antitrust officials that the deal won't stifle competition, which has only grown harder to do in light of the fact that their competition has been significantly weakened by the downturn in the oil market.

A long way from the top
Growing doubts that the deal would be approved caused Halliburton and Baker Hughes to announce in September that they would pursue additional divestitures in an effort to win over regulators. Those additional business unit sales, however, apparently are not yet enough to convince regulators in not only the U.S. but in Europe, Australia, and Brazil that the deal won't still stifle competition. It is a concern that stems from the fact that with the world's No. 2 and No. 3 oil-field service companies combining that the industry would be left with no clear strong No. 3 player that would be able to step in the gap and compete against the top two. That concern has only grown because smaller oil-field service players such as C&J Energy Services (NYSE:CJES) and Weatherford International (NYSE:WFT) have had their struggles during the downturn.

Some of that concern stems from the fact that both Weatherford and C&J Energy Services have weak balance sheets and can't even compete to buy the assets that Baker Hughes or Halliburton are proposing to divest. The chart below is pretty clear of the divergent credit metrics between the two groups:

BHI Debt to Equity Ratio (Quarterly) Chart

BHI Debt to Equity Ratio (Quarterly) data by YCharts.

C&J Energy Services has already pretty much tapped out its financial capacity after making a big acquisition of its own. In fact, C&J Energy Services recently had the borrowing base on its credit facility cut from $400 million to $300 million due to growing financial worries, which left it with precious little liquidity given that it had borrowed $106.6 million on that facility. Making matters worse, it has had to aggressively reduce prices in its completions business just to keep one of its primary customers, which has really squeezed its margins and is causing it to operate in the red.

Meanwhile, Weatherford has already said that it is out of the running for any assets that Halliburton or Baker Hughes is selling. While it reportedly liked Halliburton's Sperry Drilling business, it "could not get over the cost of capital" to make the deal feasible. That's largely due to the fact that investors didn't like Weatherford's idea to raise capital earlier this year, and it is still working toward earning an investment grade credit rating, which isn't likely before 2017. 

Not the right company to fill the gap
Meanwhile, according to the rumor mill, those assets would, instead, likely wind up in the hands of a big industrial buyer such as General Electric (NYSE:GE). In fact, according to a report by Bloomberg, GE is in advanced talks to buy Halliburton's drill bits and drilling services divisions for upward of $5 billion. Further, GE is also exploring bids for other assets that would need to be sold, including Baker Hughes' completions operations.

That said, even with those additions GE's oil and gas business still won't come close to rivaling the top oil-field services players. While GE has grown its oil and gas division largely through $10 billion in acquisitions over the past decade, those deals have largely been on the equipment side, and not the services side. Further, to become a major player in the services sector it would have to be willing to take on business units that are lower in margin, such as Baker Hughes' completion operations. However, as C&J Energy Services has shown this year completions margins can get quite tight, which doesn't exactly a fit within GE's focus on owning higher margin businesses.

Investor takeaway
The biggest threat to the Baker Hughes-Halliburton merger is the fact that it will remove the industry's No. 3 player at a time that it is really lacking a strong No. 4, especially with most rivals growing weaker during the downturn. Further, while a company like GE certainly has the financial firepower to quickly build a large presence in the space, it's uncertain whether or not it would invest to compete in that space, too, especially given the lower margins that services earn. This is all pointing to the very real possibility that this deal might not get done.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Halliburton. The Motley Fool owns shares of General Electric Company. 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.