Halliburton-Baker Hughes Mega Merger: What If It Happens?

On Thursday, reports surfaced that oilfield service behemoth Halliburton Co. HAL was in talks to buy smaller rival Baker Hughes Inc. BHI.

A potential deal would combine the two big Houston-based firms that help energy companies find and extract oil/gas in an environment where plunging crude prices have hit them badly. Baker Hughes shares ultimately finished up 15.24%, after the rumor was confirmed by a company statement, while Halliburton stock edged up 1.05%, amid heavy volumes.

In fact, the potential merger between the two aforementioned heavyweights energized the whole sector as evident from the 5.76% gain for Weatherford International plc WFT, a comparatively smaller player.

What's in It for Halliburton?

For starters, Halliburton has reason to want Baker Hughes.

Apart from the elimination of a major competitor, a combination with Baker Hughes would provide the world's second-biggest provider of oilfield services a much needed boost in taking on the largest player in the field, Schlumberger Ltd. SLB.

Schlumberger – with a market capitalization of $122 billion – has operations in approximately 85 countries, leading to a competitive advantage that often translates into higher margins due to economies of scale. A Halliburton-Baker Hughes combination might neutralize this over the long run through cost absorptions and efficiencies, thereby expanding profitability, global footprint and market share.

In particular, the merged entity would have a dominating presence in North America, where hydraulic fracturing ('fracking') procedure is a big money maker for oilfield service companies. Moreover, a bigger size would also enable more pricing power and insulation from sustained market downtrend. 

Last but not least, with Baker Hughes Halliburton would get the knowhow to boost volumes from the aging fields, a yet-unfulfilled gap in its portfolio. Halliburton – carrying a Zacks Rank #3 (Hold) – would also gain Baker Hughes' famed oil tools unit.

Expected Hurdles

Given the massiveness of the combined entity – with a potential 40% market share in the $25 billion domestic onshore fracking market, more than twice that of Schlumberger – the regulators might want it to take certain steps to prevent it from abusing its size.

North America is the region where the two companies have some of the greatest overlap, and Halliburton and Zacks Rank #4 (Sell) Baker Hughes would have to assess whether any asset divestments are necessary to satisfy antitrust requirements.

Finally, the amalgamation of two companies, both big and very different, is not expected to be a cakewalk. The unification process could take years, and may derail Halliburton's focus in the process. 

Bottom Line

Should the deal go through and the No. 2 and No. 3 oilfield service providers tie up, it will create an industry powerhouse with a market value approaching $70 billion and 140,000 employees, seriously challenging the might of Schlumberger.