BHI Baker Hughes Incorporated

By Alison Sider 

Halliburton Co. and Baker Hughes Inc. called off their merger, once valued at nearly $35 billion, which encountered opposition on several continents from regulators who claimed that it would hurt competition in the oil-field services business.

The deal to combine the world's second- and third-largest oil-field services firms after Schlumberger Ltd. appeared troubled since April 6, when the Justice Department filed a lawsuit to block it. The merger also had encountered opposition from regulators in Europe.

The companies had anticipated regulatory challenges when they originally struck their agreement in 2014, but repeatedly stressed that they felt the obstacles could be overcome, even as analysts and other experts questioned the risk.

The two sides previously set April 30 as the day when the agreement would expire, allowing either to walk away from the deal.

Halliburton said Sunday evening that it would pay a $3.5 billion breakup fee to Baker Hughes -- a condition of the merger agreement put in place in a nod to anticipated regulatory challenges.

At current share prices, the deal would have been valued at more than $28 billion.

"This was an extremely complex, global transaction and, ultimately, a solution could not be found to satisfy the antitrust concerns of regulators, both in the United States and abroad," Baker Hughes Chief Executive Martin Craighead said in a statement Sunday night.

Halliburton CEO Dave Lesar said challenges in obtaining regulatory approvals as well as "general industry conditions that severely damaged deal economics led to the conclusion that termination is the best course of action."

The Justice Department suit argued that the merger would eliminate head-to-head competition in as many as 23 product lines, which would lead to higher prices and less innovation.

At the time, both companies were aggressive in their pledges to fight back, contending that they believed they could disprove the Justice Department's allegations in court. They sought to have the case heard in Texas, where some analysts said they would be more likely to prevail.

U.S Attorney General Loretta Lynch described the decision to abandon the deal as "a victory for the U.S. economy and for all Americans."

"This case serves as a stark reminder that no merger is too big or too complex to be challenged," she said in a statement Sunday.

While the companies' efforts to sell off businesses had left antitrust officials unmoved, Halliburton pressed ahead in serious talks with Carlyle Group, a private-equity firm with a long track record of creating stand-alone businesses from the castoffs of larger companies.

Halliburton had been in talks with both Carlyle Group and General Electric Co. about a package of divestitures to appease regulators that could have fetched between $6 billion and $7 billion in a sale, people familiar with the matter have said.

The end of the merger leaves those divestiture plans uncertain. News that the companies were preparing to end the merger was reported earlier Sunday by Bloomberg.

Halliburton announced late last week that it would take a $2.1 billion restructuring charge to its first-quarter earnings, relating to severance costs from layoffs and writing down of the value of some of its assets, like older fracking pumps that are no longer being used.

In the past, Halliburton has said it had to keep some excess infrastructure in place, despite the downturn, to be ready to integrate Baker Hughes and quickly ramp up as a combined company.

Due to the breakup fee, a newly independent Baker Hughes would be flush with cash, which some analysts have said will give it the cushion it needs to retrench. But experts say a failed deal also presents major challenges for the company, which was formed in 1987 through the merger of Baker International and Hughes Tool Co., which was founded by the father of billionaire aviator, inventor and Hollywood tycoon Howard Hughes Jr.

The elder Howard Hughes patented a new drill bit with two rotating cones that could chew through hard rock, allowing drillers to reach oil deeper below the Earth's surface than they ever had before.

Even today, Baker Hughes is considered a leader in developing new technologies for the oil patch. The company, however, has struggled in its newer ventures into businesses such as fracking, which require mastery of vast supply chains and logistical challenges, said analysts at Piper Jaffray Co. And the company's struggles have been compounded by a year in limbo, tethered to Halliburton.

Oil-field services firms, which are hired to drill and frack wells, were among the first to feel the pain from lower oil prices, and have been forced to make some of the deepest cuts. Most are losing money in big markets such as North America.

But Baker Hughes has been constrained by its merger agreement from making sweeping changes without Halliburton's approval. The company said this week that it carried $110 million of costs during the first quarter that it wasn't able to cut because of the merger, contributing to its $981 million loss.

With the merger scuttled, "the company can begin restructuring and stripping these excess costs from the system," Raymond James analysts wrote last week, anticipating that the deal would be called off.

For the rank-and-file at Baker Hughes, the slow-moving merger compounded the uncertainty created by plummeting oil prices, and many of those who could find other jobs have left, according to analyst reports and interviews with former employees.

Still, many analysts believe that all the hand-wringing about Baker Hughes's fate is overblown: Standing on its own, the company could shake off the malaise that has plagued it in the past year.

Unlike many of its peers, Baker Hughes will have about $5 billion to spend when oil prices recover and activity ramps up, so it could rebuild and could come out swinging.

"Independently, Baker would quickly become a turnaround story," Evercore ISI analyst James West recently wrote.

Baker Hughes may get a push from the outside. ValueAct Capital Management, an activist hedge fund, bought Baker Hughes shares shortly after the merger was announced

In April, the fund disclosed that it increased its stake and is now Baker Hughes's largest shareholder, with 9% of its shares.

ValueAct previously has pushed for Baker Hughes to consider breaking itself up and seeking other buyers if the merger falls apart, according to a lawsuit brought by the Justice Department over how ValueAct disclosed its initial stake in the company. And the fund has signaled that it won't sit by quietly as Baker Hughes gets its house in order.

In a recent securities filing, ValueAct indicated that it may seek a seat on the company's board.

Write to Alison Sider at alison.sider@wsj.com

(END) Dow Jones Newswires

May 02, 2016 02:47 ET (06:47 GMT)

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