Slumping crude oil prices justify consolidation push

Hostilities may have derailed Halliburton acquisition

Word surfaced Monday that Halliburton, one of the world's largest providers of oil field services, will pay $34.6 billion to acquire peer Baker Hughes. The deal was struck after the two parties reportedly failed to reach an agreement on the price of the takeover and other key issues and Halliburton threatened to replace the latter's entire board. Instead of a hostile approach, a friendly agreement could help the merger win approval from antitrust regulators in the US and elsewhere.

Halliburton has plenty of good reasons to pursue such an acquisition now. The move comes on the heels of a major downturn in global crude prices, which investors fear could cut into business for oil field service firms. Against such a backdrop, a merger could relieve some of the pains from slumping oil prices for both Halliburton and Baker Hughes.

Yet, a drop in oil prices alone, which could prove to be only temporary, is not enough to justify the $34.6 billion acquisition decision. From a long-run perspective, the merger is likely to help Halliburton enhance its ability to compete in the global market while also bringing it synergistic benefits.

News of merger talks between Halliburton and Baker Hughes, first reported Thursday by the Wall Street Journal, spread fast, sending the latter's stock price up by some 15 percent on the day. However, Baker Hughes had reportedly pulled out of the talks the following day, citing Halliburton's refusal to increase its offer as well as its refusal to guarantee that it would not solicit its rival's employees before the closing of the deal.

For its part, Halliburton put forward plans to take over Baker Hughes' board of directors, nominating candidates to the board for the latter's annual director election next year.

The situation changed again Monday, with reports that the two have reached an agreement on the takeover bid. As a result, Halliburton withdrew all of its board nominations as the threat of a hostile confrontation subsided.

Given potential antitrust concerns and other complexities, a friendly approach could go a long way toward winning regulatory approval. If the merger does happen, it would become one of the largest acquisitions in the oil services sector in recent history.

With a combined market valuation of about $70 billion, the merged giant would be the biggest oil field services provider in North America. Inevitably, such a big deal would draw close antitrust scrutiny from US and international regulators, and the two companies would have to sell billions of dollars in overlapping assets in order to win over regulators.

Needless to say, without a cooperative partner company, it would be extremely challenging to dissipate antitrust concerns and satisfy authorities.

But despite the above-mentioned barriers, the consolidation still makes a great deal of sense given the continued slide in global crude prices.

With competition growing increasingly fierce in the oil field services industry amid rising oil and gas drilling costs, investors are concerned that falling oil prices may force gas and oil producers to trim spending on new exploration projects.

As the market becomes more challenging, the takeover of a smaller rival could help a company expand its market portfolio and stay afloat amid the downturn.

Yet, it should be pointed out that the outlook for oil prices remains uncertain.

In turn, the future of the oil field services industry appears similarly unsettled. In this connection, the softening oil market may be just the catalyst for industry consolidation. A takeover decision worth around $35 billion should be based on logical motives. From a long-term perspective, a merger between Halliburton and Bakers Hughes would produce a bigger giant with stronger market clout and more robust technological capabilities.

Once healthy synergies are realized, the business would see deeper cost cuts, higher revenues and a strengthened market portfolio. All these benefits are crucial these days for any industry player. In this sense, the trend of industry consolidation may just be starting.