Halliburton - Maybe ValueAct Really Is "The Mullet"

The proposed merger between Halliburton HAL and Baker Hughes BHI has received a lot of scrutiny over the past several months. Now the DOJ has added ValueAct Capital to the soap opera, suing the hedge fund for an antitrust violation:

The lawsuit centers on a 40-year old U.S. law that exempts investors who buy up to 10 percent of a company's voting securities from disclosing purchases made only for passive investment purposes.

The Department of Justice alleges that ValueAct was an active investor from the time it started to build its position in both companies shortly after the November 2014 merger agreement, and that the hedge fund violated the law - known as the Hart-Scott-Rodino (HSR) Act - by waiting too long to disclose its intentions ...

The lawsuit said ValueAct used its access to senior Halliburton and Baker Hughes executives to formulate the merger and other strategies. The government is seeking a civil penalty of at least $19 million - a penalty it deemed "significant."

This has to be the oddest antitrust lawsuits I have ever seen. I have been pessimistic on the merger, and predicted that both BHI and HAL would plummet once the deal was not approved. In October I questioned whether Valueant was providing mullet money, or "dumb money" with its investment in BHI. Even I could not have foreseen that the hedge fund would have failed to disclose major stakes in both companies, as the DOJ has claimed.

The Situation

Halliburton and Baker Hughes have trumpeted additional customer efficiencies and cost savings from the deal. However, It would not be unheard of for an investor to attempt to reduce competition by merging the numbers two and three companies in a particular field. With ValueAct reportedly playing a major role behind the scenes, the picture is starting to become a little more clear.

ValueAct says it will fight the lawsuit, but it does not appear to have a leg to stand on. This isn't subjective. Either it owned a 10% stake in both HAL and BHI or it did not; either it has taken an active role in the merger or it has not. In November ValueAct disclosed [i] it had discussions with both Halliburton and Baker Hughes pursuant to the merger and [ii] Halliburton would do whatever was necessary to achieve antitrust approval. I was stumped by the entire scenario. Why was ValueAct involved and how could it project itself into the deal? Secondly, why would the management teams of BHI and HAL allow ValueAct to have any role, especially a highly-publicized one. Lastly, was management leading the deal or ValueAct?

Who Does The Merger Benefit?

Several authors and bloggers have written about the proposed merger. Most of the narrative has been around the amount of money arbitrageurs and hedge fund managers stood to make if the transaction was consummated. The benefits to customers was hardly ever mentioned, if at all. Since the Financial Crisis of 2008 it has appeared that the financial markets only existed in order to cater to hedge funds. By creating record low interest rates and providing liquidity to financial markets, the Fed created a "wealth effect" by front-loading stock market gains. In turn, hedge funds have made a mint by "betting with the Fed."

On my previous article I opined HAL's CEO, Dave Lesar, was catering more to hedge fund managers than customers:

Shock Exchange: Lesar is catering to hedge fund managers looking for a sure trade. Once this deal is done they will dump HAL like a bad habit.

My thesis was that if the deal was not in the best interest of customers or in the long-term interests of shareholders, it likely would not receive regulatory approval. Regulators from Australia to Brazil to the EU have questioned [i] whether the transaction would lead to less competition in the oilfield services space and/or [ii] whether higher prices would ensue. Even more damning is that Angola's state oil company, Chevron Brazil and Total SA's TOT CEO have all complained about the merger. A lack of support from customers makes the transaction even more unlikely.

Sans the merger, I believe HAL and BHI will both decline to the $25 range; that represents a 23% and 33% fall for HAL and BHI, respectively. Facing double-digit investment losses and a $19 million lawsuit, maybe ValueAct really is the mullet.