ValueAct Suit Reveals U.S.'s Dim View of Halliburton Deal

  • U.S. sues investor over Baker Hughes, Halliburton holdings
  • Fund bought shares with intent to influence merger, U.S. says

U.S. Justice Dept. Sues ValueAct, Here's Why

Halliburton Co.’s planned takeover of rival Baker Hughes Inc. threatens to undercut competition in the oil-services industry, the U.S. Justice Department said as it sued an activist hedge fund for buying stakes in both companies without properly notifying the government.

The government expressed its view of the deal in a lawsuit filed Monday against funds run by ValueAct Capital Management, which purchased more than $2.5 billion in shares of the two companies to be in a position to help the deal close, according to the complaint.

In a warning to shareholder activists, the U.S. said the acquisitions "allowed ValueAct to become one of the largest shareholders of both Halliburton and Baker Hughes, without providing the government its statutory right to notice and prior review of the stock purchases." The filing also offered an unusual glimpse into the Justice Department’s skepticism about the deal and sparked fresh pessimism from investors about the tie-up, which has faced resistance from enforcers around the world.

"ValueAct established these positions as Halliburton and Baker Hughes were being investigated for agreeing to a merger that threatens to substantially lessen competition in numerous markets," it said. 

ValueAct, led by Jeffrey Ubben, said in a statement in response to the complaint it acted "entirely properly and in compliance with the law" and said it would contest the government’s action.

Early Resistance

The Justice Department’s antitrust division is investigating Halliburton’s takeover of Baker Hughes, a deal valued at $34.6 billion when it was announced in November 2014. The takeover, which would unite the No. 2 and No. 3 oil-services firms behind Schlumberger Ltd., faced early resistance from U.S. officials, people familiar with the matter have told Bloomberg News. Doubts about the deal continued even after Halliburton offered to sell additional assets to address antitrust concerns, people have said.

Typically, merger reviews are confidential until the U.S. has decided whether to clear a transaction, sue to block it, or agree to allow the deal with conditions.

Baer Meeting

Halliburton met recently with Bill Baer, the chief of the antitrust division, in a bid to resolve government concerns that the deal will harm competition, according to a person familiar with the matter who declined to be named because the investigation is confidential.

The proposed Halliburton-Baker Hughes merger has also faced hurdles in Europe, where the European Commission stopped the clock on its review of the tie-up for the third time, saying crucial details were missing.

Halliburton shares fell 3.1 percent to $34.00 in New York while Baker Hughes closed down 3.5 percent at $41.47 after falling as much as 6.3 percent, the most since Jan. 25. The percentage difference between the offer price for Baker Hughes and its current price peaked Monday at 38 percent, indicating investors are more skeptical than ever that the deal will close.

Federal law requires investors to notify antitrust officials about the purchase of company stock. That applies even when buying minority stakes, unless the investor buys less than 10 percent of outstanding shares and has no intent of participating in the company’s business decisions.

ValueAct says it plans to fight the U.S. complaint because it threatens to chill the kind of communications with companies it says are necessary for investors to make fully informed decisions.  

$19 Million Penalty

The U.S. said ValueAct bought stakes in Halliburton and Baker Hughes after the deal was announced with the intent to influence the companies amid the merger investigation. It used its stakes to gain access to management, learn information about the merger review and attempt to improve the chances that the deal would close, said the U.S., which is seeking a $19 million penalty.

ValueAct countered that when it bought stakes in both companies after the merger announcement, its holdings were entirely passive, even though the firm spoke with the companies for investment research purposes -- as it routinely does and as other major investors would do. 

It wasn’t until October that ValueAct decided to take a more active role in Baker Hughes, at which point it amended a regulatory filing and notified antitrust officials before buying more shares.

ValueAct is the fifth-largest shareholder of Baker Hughes with a 5.3 percent stake and the eighth-largest investor in Halliburton with 1.9 percent as of the end of last year, according to Bloomberg data.

Monday’s action isn’t the first time ValueAct has been challenged for failing to report securities purchases. Nearly nine years ago, ValueAct agreed to pay $1.1 million to the Federal Trade Commission to settle charges it failed to report acquisitions of voting securities in technology research company Gartner Inc., digital advertising company Catalina Marketing Group and data marketing company Acxiom Group.

The case is U.S. v. VA Partners I LLC, 16-01672, U.S. District Court for the Northern District of California (San Francisco).

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