Baker Hughes And Halliburton Merger Problems

          It has been a great few weeks for those of you who are lucky to be invested in the stock market. Indexes continue to hit all new highs and oil prices continue to decline along with gas prices (which is great for the drivers). Mergers and spinoffs are in the air as well, with Hasbro’s talk of taking over DreamWorks, Halliburton attempting to take over Baker Hughes and Virgin America’s successful IPO. However, as someone who has investments in the oil services industry, I am fascinated by the takeover talk about Halliburton and Baker Hughes.

          Halliburton is one of the largest companies in the world with a market cap of over $46 billion. The company is the 2^nd largest oil services company by revenue after Schlumberger. The company is reported to be in merger talks with competitor Baker Hughes (a remnant of the once proud Hughes empire, owned by reclusive billionaire Howard Hughes), and the 3^rd largest oil services company with a market cap of $25.9 billion.

          Baker Hughes reported that talks between the two oil service giants have stalled and that Halliburton was seeking to replace the entire board of Baker Hughes at the next shareholder’s meeting in April. Since Baker Hughes puts its directors up for re-election every year, this provides an opportunity for Halliburton to take control of the company in one swoop. There are several factors to consider before one can cheer about a possible merger or buyout.

            First, you should consider government anti-trust laws. A combined Halliburton and Baker Hughes would be the largest company in the industry with a market cap of over $70 billion. The combined company would control some 25% of the market for oil services and use this power to squeeze smaller competitors out of business, or at least that is what regulators will likely say. Also, if Halliburton does turn to a hostile takeover (as it appears it has) it would be harder to convince regulators to agree to the deal. I will not make any prediction on the likelihood of a deal occurring or not, my objective is to determine whether a combined Halliburton and Baker Hughes would make a good investment.

          To find that out, it is necessary to look at the oil services industry as a whole. Oil services is an industry that helps oil companies such as Exxon and Chevron explore for oil and natural gas while providing the equipment to do so. The industry has been on an upswing these last few years as the shale oil boom has benefited the energy sector. Companies like Halliburton have made billions providing the tools in this new energy boom and the increase in their stock reflects that (in 2012 Halliburton’s stock increased almost 40%). In recent months as oil prices have plummeted from $100 a barrel to under $75 a barrel, shares in oil service companies have fallen sharply. In the last 3 months Halliburton’s stock has fallen some 20%.

          The falling stock prices at Halliburton and some of its competitors may present an opportunity, since they would naturally go up when oil prices rebound. This is probably the reason Halliburton is making a bid for Baker Hughes, to take advantage of the lowered market price. With that said, investors who see value in the oil service industry should be careful. Many divisions and companies in this sector are in danger of failing in the future. A perfect example is ocean rigs. This process was great when oil prices where high since the process is quite expensive but recently as oil prices have plunged, ocean drilling has fallen out of favor. This has caused stocks in ocean drillers such as Transocean and Ensco to collapse. Baker Hughes and Halliburton both have ocean drilling divisions which will suffer without a doubt if oil prices remain low. For investors who are determined that oil will rebound, buying into large oil service companies might be an attractive proposition. However, they must be certain that oil prices will rebound, and now that does not look likely.

          The oil service industry is also under threat from new advances in drilling which allow companies to extract more oil from fewer drills. Another possible problem is that with the energy boom many newcomers have joined the space, including some other large corporations. This increase in competition will eventually hurt the big names like Halliburton.

          As for Baker Hughes and its proxy battle with Halliburton, there is a possibility that the 3^rd largest oil service company will see its stock go higher (even higher than it already has gone, the stock rallied 15% on Thursday as the Halliburton buyout was announced). The reason for this enthusiasm is that other companies might make a bid for Baker Hughes since many see potential in the energy boom and see depressed oil prices as a potential buying opportunity. So, if you are bullish on oil, oil service companies and specifically Baker Hughes might be a good buy for you.