Halliburton Merger Is Driven by Cheap Oil and a Smell of Fear

Courtesy of BusinessWeek. By Matthew Philips

Four days after news broke that Halliburton (HAL) was in talks to buy fellow oil-services company Baker Hughes (BHI), it appears a deal has been struck and Halliburton will pay $34 billion to acquire its rival. On a revenue basis, the combined company could become the world’s largest oil drilling operation, surpassing Texas giant Schlumberger (SLB).

To say that the Halliburton deal came together fast is an understatement. Deals this size typically take months to consummate. According to Bloomberg, Halliburton initiated talks by contacting Baker Hughes several weeks ago. Things got dicey over the weekend. As talks slowed, Halliburton apparently started getting anxious and began mulling a hostile takeover. There were even reports of Halliburton threatening to oust the entire Baker Hughes board.

So why the rush? Simple: Falling oil prices have spooked both companies. With oil prices down 30 percent since June, there is real concern that at some point soon, oil will become too cheap for many companies to drill for it profitably. That means fewer oil rigs and less money for Halliburton and Baker Hughes, both of which rent out rigs to leaseholders and charge them big bucks for their fracking expertise, among other services. There is already a record number of oil rigs operating in the U.S., more than in the rest of the world combined. It’s doubtful those numbers can withstand such a steep drop in prices.

Halliburton gets about half its total revenue from operations in North America. Although it just posted a blow-out third quarter, largely on the back of better-than-expected results in North America, it’s hard to see that growth continuing in the face of $75 oil. So Halliburton needs a dance partner. Combining with Baker Hughes makes a lot of sense. It will insulate both companies from a pullback in drilling and potentially allow them to keep prices higher than they would’ve been if they were forced to compete for declining demand.

But what about the deal itself? Did Halliburton pay too much? Early signs indicate that it did, by a lot. Shares of Baker Hughes had fallen nearly one-third since July, from $75 to $50 as of last week. As part of the deal, someone who owns a share of Baker Hughes will get 1.12 Halliburton shares, plus $19 cash. That values a share of Baker Hughes at $78.62, a 31 percent premium to its Nov. 14 closing price and $4 more than its all-time high.

It’s looking like the market can smell Halliburton’s desperation. Its share price was already down 25 percent since July. By mid-morning, Nov. 17, Halliburton shares were off nearly 9 percent, to $51. Baker Hughes, on the other hand, was soaring, with its shares up $17, to $67 each.

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