Halliburton Co.’s takeover of Baker Hughes Inc. is facing resistance from U.S. enforcement officials who are concerned the tie-up could hurt competition, according to a person familiar with the matter.
Justice Department lawyers reviewing the proposed $34.6 billion transaction are worried about consolidation in the industry from combining the No. 2 and No. 3 firms, said the person, who asked not to be identified because the review is confidential. Though Halliburton has proposed selling some assets to other companies, government officials aren’t convinced its plan would restore sufficient competition, the person said.
Although a final decision hasn’t been made yet, the department’s antitrust division is positioned to carry out a legal challenge if it decides to try to halt the deal, which the companies aim to complete by December. The unit has assigned John Read, a seasoned litigator, to oversee the Halliburton review, according to two people familiar with the staffing decision.
Among his successes, Read helped win the division’s antitrust lawsuit against American Express Co. over its merchant rules for credit cards. Antitrust lawyers describe him as a formidable opponent who could bring a merger case to trial.
Baker Hughes fell as much as 13 percent before recovering to close down 3.9 percent at $58.28 in New York. Halliburton slipped less than 1 percent to $41.54.
Halliburton is much smaller than the industry leader, Schlumberger Ltd., and the addition of Baker Hughes is designed to expand its technology portfolio and make it a stronger competitor. After completing its plan to shed assets that generate as much as $7.5 billion in annual revenue, Halliburton would be a little more than half the size of Schlumberger.
If the deal gets blocked, Halliburton and Baker Hughes could lose almost $2 billion in cost savings at a time when they are cutting expenses after a 50 percent drop in crude oil prices forced customers to slash more than $100 billion in spending this year.
If the deal is blocked on antitrust grounds, Houston-based Halliburton will have to pay a breakup fee, of 10 percent of the deal’s value, to Baker Hughes.
The spread between Baker Hughes’ current share price and the offer price has narrowed since the deal was announced, reflecting investors’ increasing confidence the proposed merger will close.
Halliburton expects to complete auctions for the two assets it’s selling sometime this fall, Chief Executive Officer Dave Lesar told analysts and investors July 20 on a conference call. The companies are negotiating with regulators around the world about what other business lines it may have to divest, the companies said earlier this month. The companies said they’ve reached an agreement with the Justice Department to extend the review and targeted closing the deal no later than Dec. 1.
“We are fully committed to our target of closing the pending Baker Hughes acquisition in late 2015,” said Emily Mir, a spokeswoman for Halliburton. Melanie Kania, a spokeswoman for Baker Hughes, wasn’t immediately able to comment. Emily Pierce, a Justice Department spokeswoman, declined to comment.
Halliburton has received interest from several dozen potential buyers for its Sperry drilling business, which helps direct drills as they descend into a well, as well as for its drill-bits manufacturing unit. The companies are also planning to sell Baker Hughes’ cementing division, and a bundle of fracking-related tools used to complete wells, people familiar with the matter said in March.
Justice officials are concerned that if smaller companies buy those assets, they may not be able to compete effectively with Schlumberger and an enlarged Halliburton, the person familiar with the review said. Customers have complained to the department about the merger, the person said.
Justice Department antitrust lawyers may be concerned that oil companies that have to contract services from several smaller suppliers could ultimately face higher costs, said Hill Wellford, an attorney at Morgan, Lewis & Bockius LLP in Washington.
“The Justice Department takes very seriously the opinion of highly sophisticated purchasers who know the market,” he said.
Companies could be more efficient by putting together their lineup of suppliers at the start of drilling projects instead of looking piecemeal for contracting services later, Wellford said.