Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Now what, Halliburton?

After more than a year of increasingly acrimonious back-and-forth with antitrust regulators (capped off by a U.S. Department of Justice lawsuit), the oilfield-services company finally put the kibosh on its $28 billion merger with Baker Hughes. Halliburton shares climbed as much as 3.7 percent Monday as shareholders celebrated their official freedom from what had become an all-consuming distraction.

Relief Rally?
Halliburton has climbed since the DOJ moved to block its purchase of Baker Hughes last month. But the company will have to answer tough questions on its strategy.
Source: Bloomberg

Management should enjoy the moment, because those same investors are likely to have tough questions when the company convenes a call Tuesday to discuss the failed takeover and its first-quarter earnings results.  Halliburton is expected to report a more than 40 percent decline in revenue for the first three months of 2016 and will have to offer up a plan B for how it plans to cope with the tough energy environment. More aggressive cost cuts are likely, as are plans to pay down debt -- neither of which will achieve the same result as a Baker Hughes merger. 

It was a deal that made a lot of strategic sense: Halliburton would add scale to better compete with Schlumberger in offering lower-cost bundles of energy gear and reap $2 billion in synergies. But the transaction's spectacular collapse raises questions of how prepared Halliburton was to navigate the rocky road toward antitrust approval so it could actually execute the tie-up. The company seems to have significantly underestimated the level of pushback for a combination of the No. 2 and No. 3 oilfield services providers.

Back when the deal was announced in November 2014, Halliburton said it was willing to divest businesses that generate as much as $7.5 billion in revenue to appease regulators, but believed the actual required asset sales would be "significantly less." That calculation gave it the confidence to offer Baker Hughes an unusually high breakup fee of $3.5 billion -- or 10 percent of the transaction's announced equity value -- should regulators protest the deal. Asked repeatedly by analysts about the merger's odds of approval, Halliburton's executives were confident they wouldn't have to pay that -- in hindsight, overly so. Here's Halliburton CEO David Lesar:

     ``We have the best antitrust counsel available on this, and we clearly would not have done this deal if we didn't believe it was achievable from a regulatory standpoint. In fact, that's why the reverse breakup fee is there and at the size it is because we are absolutely confident that we're going to get this thing done.''

Halliburton was certainly not the only one to be overly bullish. A number of analysts and merger-arbitrage experts thought this deal would ultimately pass muster, perhaps with a few extra divestitures. Some still think it should have been approved, with Evercore ISI's James West arguing the Justice Department overstepped its bounds in challenging the acquisition. And to some extent, this deal may have been a victim of timing. Antitrust scrutiny of mega-mergers has increased as the number of such deals has grown and regulators may have already made up their minds to say no regardless of what the companies did.

(Not) Done Deals
Buyers have already terminated more than $330 billion of deals so far this year, led by the collapse of Pfizer's $160 billion merger with Allergan. That's almost as much as in all of 2015.
Source: Bloomberg

But the real thorn in the DOJ's side seems to have been the nature of the package of assets Halliburton was willing to give up. Bill Baer, former head of the department's antitrust arm, called it a "grab bag" that was "so complicated and convoluted" it would turn the division into an energy-sector regulator. David Gelfand, a senior attorney with the DOJ's antitrust unit, said the assets had such a high chance of becoming less competitive once sold that the proposed divestitures would be the equivalent of dumping businesses in a lake. 

According to the DOJ's lawsuit, Halliburton wanted to divest just parts of certain businesses (say, for example drill bits -- but not all intellectual property or customer contracts tied to them), the effect being that it could still end up making money off of those very assets. In other words, Halliburton was willing to give up $7.5 billion of assets, but only on its own terms. That doesn't exactly smack of compromise.  The Justice Department was also reportedly interested in having a single buyer for the divested assets, according to the New York Post. That's the kind of thing companies ideally would have lined up before a deal is announced, because the buyer's negotiating hand only gets stronger as the regulatory process drags out. The bottom line: Halliburton should have been better prepared, or at least quicker on its feet. 

Big risks often end in big defeats. The next time a buyer trots out a chunky breakup fee and dismisses the risk of a regulatory battle, alarm bells should be going off in investors' heads. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Halliburton expected regulators to ask for about half of the proposed $7.5 billion in asset sales, a person familiar with the matter said at the time. 

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Brooke Sutherland in New York at

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