It was the deal that seemingly made sense to everyone -- except the trade regulators, who shot down the megamerger between oil industry services companies Baker Hughes (NYSE:BHI) and Halliburton (NYSE:HAL). Yet despite the fact that one of the two companies still has a clear advantage coming out of the failed deal, both are down this week.
In this segment from the Motley Fool Money radio show, Chris Hill, Jason Moser, and Matt Argersinger explain what the market is reacting to. Also, they talk about what Baker Hughes is planning to do with the $3.5 billion of essentially found money that it's getting from Halliburton as a breakup fee, and why a share-buyback program is a fantastic move for the company and its shareholders right now.
A transcript follows the video.
This podcast was recorded on May 6, 2016.
Chris Hill: This week, it became official: The big merger between Halliburton and Baker Hughes was called off. But don't cry for Baker Hughes; they got a lovely parting gift in the form of a $3.5 billion check. Boy, as breakup fees go, Jason, that is phenomenal for them. And yet, both stocks are down this week. I understand why Halliburton is down, because they have to write a big check. Is Baker Hughes down because people are looking at this company and thinking, "They are just in a much more troubled state than Halliburton?"
Jason Moser: I think it brings more uncertainty into the picture, which -- we know how the market reacts to uncertainty. A couple things here. Halliburton is going to be just fine. They have the financials to bear this. Though, it does bring into question, I think, leadership. You have to kind of wonder, were they entering this transaction perhaps a little over-confident, perhaps a little cocky? I don't know. I think it probably could be argued that... you could at least ask that question.
Hill: If we go back in time, we find someone at Halliburton management saying: "Oh yeah, go ahead, add in a $3.5 breakup fee. This thing's a lock; this thing's going through no problem!"
Moser: Yeah, that's something worth at least looking into. There's a lot of money that seems to be wasted in this industry. For Baker Hughes, again, it brings some more uncertainty into the picture for them, because there have been a number of different strategic initiatives they need to examine with the business, particularly now that they're not going to be a part of something bigger.
But the interesting thing, I think, here -- and actually, we talk a lot about share buybacks, and how so many companies do such a poor job at them -- this is an interesting situation, because Baker Hughes' management is talking about wanting to return value to shareholders. And with Baker Hughes, this is some found money. This is money they didn't have to do anything for. And they've talked about using some of this cash to buy back shares. In this case, I think this could work out pretty well, because most energy stocks -- and Baker Hughes is no exception -- are in the tank right now. And you want to buy back those shares when the market is really taking you to the shed. So it could be argued that they're buying these shares back at an opportunistic time. They have the financial resources to bear this storm. When all things are said and done, I think this could actually be a nice little opportunity for Baker Hughes shareholders -- if they can hang on.
Matt Argersinger: In terms of Halliburton's case, I think if you ask Paul or us on the MDP team, we wanted to see this merger go through, because I think it would create a lot of competitive advantages for both companies as a combined company. At the same time, any time I see a big acquisition or merger unfold -- and the companies are allowed to be separate -- generally, I don't feel too bad about that, because I think, especially when it's a big one like this, these acquisitions don't often create a lot of value down the road. Companies are usually, over time, better off standing alone.
Hill: Do you expect Halliburton to go shopping for a smaller acquisition? Obviously, this was a much bigger one with Baker Hughes. But do you think they're itching to buy something?
Argersinger: I think so. If you saw the conference call that Halliburton had, it's remarkable. Essentially every oil and gas service company is losing money now. You can imagine how that affects a company like Halliburton, or Baker Hughes, or Schlumberger. But imagine what's happening to the smaller players who don't have as many competitive advantages or the balance sheets. So, I think there will be room for Halliburton to make some smaller acquisitions, especially during this still-negative period in the cycle.
Moser: Yeah, I think this was probably a deal that was more important for Baker Hughes than it was for Halliburton. I think Baker Hughes really needed Halliburton more than the other way around. But at the end of the day, they'll both still be OK.