Last week, in a less-than-surprising move, the U.S. Department of Justice filed an antitrust suit against the already long-overdue merger between oil giants Halliburton (HAL 3.30%) and Baker Hughes (BHI +0.00%).
In this clip from the Industry Focus: Energy podcast, Sean O'Reilly, Tyler Crowe, and Taylor Muckerman talk about how strong of a case the U.S. government has against the two companies joining, what it could mean for Baker Hughes and Halliburton both if the deal doesn't go through, and how this whole debacle should remind investors of a few important things to keep in mind when you're considering your investment thesis.
This podcast was recorded on April 7, 2016.
Sean O'Reilly: We would be remiss if we didn't mention the Baker Hughes --
Tyler Crowe: We have a lot of lawsuits going on right now.
O'Reilly: Yeah, what's going on?
Crowe: Lawsuits all over the place.
O'Reilly: A very litigious sector lately.
Taylor Muckerman: There's been two mini-mergers and acquisitions proposed.
O'Reilly: Just a few. But, to the surprise of nobody at this table, the Justice Department filed a lawsuit for antitrust concerns for the proposed merger between Baker Hughes and Halliburton. Obviously, nobody here was surprised. Any things that surprised you from the announcement?
Crowe: Not a whole lot. I didn't think it would get so far, that the Justice Department would actually sue. I thought that --
O'Reilly: They'd make them sell stuff.
Crowe: I thought what would end up happening was -- and this was my theory, and why I wasn't as totally onboard with the idea. I thought that what was going to end up happening is, to make the merger happen, they would have to strip out so many parts to meet Department of Justice needs, that it wouldn't have been a whole lot bigger than the two separate entities in the first place. But, it seems like Halliburton-Baker Hughes is still pushing on.
O'Reilly: They want to fight. They're going to fight it.
Muckerman: Halliburton is fighting it.
Crowe: I want to get Taylor more into this.
O'Reilly: They don't want to write a $3.5 billion check.
Muckerman: Well yeah, Baker Hughes can't say, "Screw it, we're done." Only Halliburton can do that, until the end of this month. Then Baker Hughes can be like, "This isn't worth it, we're done. Give us our money."
O'Reilly: That seems likely to happen now, doesn't it?
Muckerman: Maybe, I don't know. They made a lot of changes.
Crowe: It wouldn't be the most absurd thing for Baker Hughes to step away and say, "We're done, give us our $3.5 billion, we'll take either all the debt off, or maybe we can go acquire a smaller oil services company."
Muckerman: Yeah, if oil prices were sky-high, they'd be like, "Please buy us!" But, because they can go out and maybe buy some competitors ...
O'Reilly: Well, there were some analysts though, that said -- and I wanted to get your guys' thoughts on this, and the Wall Street Journal article that I read about this -- some analysts said Baker Hughes might struggle on its own if this doesn't go through. Is there any truth to that?
Muckerman: I mean, they were kind of compared to Halliburton and Schlumberger (SLB +0.30%). They were already struggling. And they've made a lot of changes, probably internally, to help this deal go through, and traditionally, I guess, the acquirer does better after a failed merger or acquisition. But, these two compete head to head. Just handing your direct competitor $3.5 billion ...
O'Reilly: On that note, there's actually a quote that I really wanted to read. Bill Baer, the Justice Department's antitrust chief, holds no punches in his criticisms of the merger. He said -- I couldn't believe this: "I have seen a lot of problematic mergers in my time, but I have never seen one that poses so many antitrust problems in so many markets." That's kind of a scathing indictment right there. What was it, there were like 23 markets they're worried about or something?
Crowe: Yeah. They are the number two and number three in the oil services industry. And when you bring those two together, you could say Weatherford International and Superior Energy Services are competitors --
O'Reilly: Who and who?
Crowe: Exactly! So, when you bring Baker Hughes and Halliburton together, you have pretty much a duopoly in the sector, and that poses a few more problems. At least with that third player, you get a little bit more pricing competition, that makes it a little bit more favorable to the entire industry, where somebody isn't going to gouged.
Muckerman: I wonder, though, Schlumberger and Cameron, that was passed in like a day.
O'Reilly: It's been like a year and a half we've been talking about this.
Muckerman: And now they're an offshore monster on top of Schlumberger already being by far the biggest company in equipment and services in the oil field. When that passed, I was thinking, "Okay, this has a much better chance." But now, it's like, what the hell?
O'Reilly: Yeah, unbelievable.
Muckerman: I mean, Halliburton has $10 billion in cash, so losing a third of it wouldn't be the best thing in the world, but it wouldn't necessarily put them in the --
O'Reilly: Right, they would not have agreed to it if they didn't think --
Crowe: They're not heading to the bread line after this.
Muckerman: No, absolutely not. It's just, it would be tough to see a competitor -- I'd liken it to T-Mobile, who received billions twice from Sprint over failed takeovers, and now look at them. They're the fastest-growing mobile company in the world.
O'Reilly: They made good use of that money.
Muckerman: Absolutely, they didn't decide to give a special dividend.
O'Reilly: What's Baker Hughes' market cap? Does anybody know offhand?
Muckerman: Uh ... no.
Crowe: Not off the top of my head.
O'Reilly: I hate to do that to you guys.
Muckerman: That's what computers are for!
O'Reilly: That's fine.
Muckerman: Its market cap, currently ...
Crowe: $20.39 billion.
Muckerman: There you go.
Crowe: Boom.
O'Reilly: So this is a significant chunk of change for them. That's like 15-16% of their worth.
Muckerman: Right. And they only have $2.3 billion of cash on the books.
O'Reilly: Are you interested in buying Baker Hughes now?
Muckerman: Not before this happens. I'm just going to stick to my guns with Halliburton and ride this out, because regardless of whether or not this deal goes through, the stock is probably worth more than it is if oil rebounds. I'm not worried as a long-term shareholder.
Crowe: And, going back to the long-term thesis on a lot of this, what was it, late 2014 when this deal was announced? And, I admit, some of us were guilty of getting caught up in it. But, there's so much attention that's given to, do you buy with the merger or do you sell with the merger? And there's so much talk when it comes to these sort of things of buy-sell-trade, it's very speculative. I mean, we've been talking about the story for a year and a half almost now, and it looks like it's going the other way.
If there were people out there who actually bought based on the acquisition and making them a powerhouse, if that is your thesis for making your investment, you might want to wait until the ink is dry, and you can see some operational performance on an acquisition before you really start to get into it. Don't automatically dive in on an announcement. Actually be a patient investor, and see a well-performing company actually hit its targets before you dive into something like this.
