Halliburton-Baker Hughes Merger Has Fair Shot at Regulatory Approval

Halliburton's  (HAL) announcement last week that it will extend its merger agreement with Baker Hughes  (BHI) through the end of April was favorable news for the $35 billion deal. The announcement means the merger still stands a fair shot at getting antitrust approval from the U.S. Department of Justice.

A timing agreement between the companies and the DOJ expired on Dec. 15. That agreement with the government was not extended, but the Justice Department's willingness to let the deadline pass without filing a lawsuit is a sign that Bill Baer, head of the DOJ's Antitrust Division, has not concluded that a settlement is out of reach.

During the Obama Administration the DOJ has moved quickly to challenge mergers when the Antitrust Division was unhappy with the state of settlement talks. For instance, in August 2013 the DOJ stunned US Airways Group (LCC) and AMR, parent of American Airlines, by suing to stop their $11 billion merger only six months after the deal was announced. The lawsuit was filed when settlement negotiations broke down, primarily due to Baer's frustration with talks over divestitures of slots he thought were needed to preserve competition at Reagan National Airport in Washington.

The lawsuit helped focus the airlines' attention. Shortly before the trial was to begin in November 2013, US Air agreed to give up all of American's 104 air carrier slots at Reagan, 34 slots at LaGuardia International in New York City, and gates at Boston Logan International, Chicago O'Hare International, Dallas Love Field, Los Angeles International and Miami International to low-cost carriers.

Similarly, the DOJ sued to stop AT&T's (T) $39 billion deal for Deutsche Telekom's  (DTEGY) T-Mobile USA (TMUS) in 2011 just five months after the transaction was unveiled, saying the merger would eliminate an innovative player in the telecommunications industry and raise prices while offering few offsetting benefits. A federal judge ultimately agreed with the DOJ, and the deal was scrapped.

In the Baker Hughes transaction, Halliburton has failed to convince the DOJ to accept what so far it has offered to shed in order to assuage worries about concentration in the oilfield services business despite steadily upping its offer since the deal was announced more than a year ago.

Halliburton has revised its offer at least twice. In April, Halliburton said it would seek buyers for several drilling assets. Then, in September, Halliburton added completion assets used to make a well ready for production to the mix. Additional unspecified assets were offered up last month, but the DOJ still didn't bite.

The repeated rejections would seem like bad news and, indeed, the spread on Baker Hughes shares has grown since May to stand now at just over 30%, or $14. Its shares traded at $43.51 during late afternoon trading Monday.

No doubt Halliburton must offer more divestitures than the $5 billion-plus now on the table. Once the assets to be shed have been identified, the buyers must be selected. So it's likely that the regulatory review won't be completed until close to the companies' April deadline -- and company executives know a merger challenge will come if they are inflexible in responding to the DOJ's concerns.

One potential flashpoint is whether the DOJ insists that all or a majority of the assets go to a single buyer so that the divestiture creates a third competitor that can offer a range of services on par with the merged Halliburton-Baker Hughes and industry leader Schlumberger  (SLB) .

So far, there's no indication that the DOJ will make such a heavy demand. However, it's also likely that in a few key areas the DOJ will want to make sure the divestiture buyer has a market presence to at least offset the loss of competition posed by the elimination of Baker Hughes as an independent entity.

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