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Halliburton, Baker Hughes CEOs dust selves off after merger knockout


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Halliburton, Baker Hughes CEOs dust selves off after merger knockout

Afterseeing their planned mega-merger collapse, the top and executives discussedtheir plans to brushoff their disappointment and move forward.

Themerger, which was agreed to in November 2014 at a valuation of $34.6 billion,was called off May 1 after months of stiff opposition from the U.S. Departmentof Justice and the European Union. During a special call to outline his company'sstrategy, Baker Hughes CEO Martin Craighead expressed his displeasure at havingthe merger called off.

"Iwant to express my disappointment with the outcome of the merger," he said."There's no other way to put it."

Craigheadwent on to describe Baker Hughes' plan for "changing significant parts ofour business in the coming weeks and months" to be more cost-efficient andcompetitive in a difficult market environment. The CEO said Baker Hughes has aunique position in the oil-field services industry that it can use to itsadvantage. "We have some of the most envied product brands inthe industry," Craighead said. "We are already differentiated in themarket and intend to grow on the position."

Baker Hughes prepared

Craigheadsaid Baker Hughes officials had been examining the industry downturn and makingplans in case the deal fell apart. "We have a different viewof the business model and what it will take to successfully and profitablyserve a variety of global markets," he said.

Whileadmitting the industry is in a "lower for longer" price trough,Craighead cited an expected increase in well completions in North America andBaker Hughes' "well-established footprint" in deepwater operations asreasons for optimism.

"Webelieve our overarching strategy — delivering step changes in the economics ofconstructing wells, providing technology solutions to optimize production, andproviding products and services to improve recovery — is the right one,"he said.

Craigheadsaid Baker Hughes will look to make several major changes to its makeup andapproach as an independent entity.

"Wewill be more selective and more creative as we look at opportunities for ourproduct lines globally," he said, citing the U.S. pressure-pumpingbusiness as one area the company will cut back quickly. He said the companyalso has $500 million in "overhang" from the merger that it will cutby the end of 2016.

"We'renot going to stop there," Craighead said. "We see more opportunitiesfor expansive structural changes that can be implemented longer term."

BakerHughes received $3.5 billion from Halliburton as the merger breakup fee, andthe company said it intends to use the proceeds to buy back $1.5 billion instock and $1 billion in debt, as well as refinance its $2.5 billion creditfacility.

BakerHughes executives refused to address what caused the merger to collapse, but ashort time later, Halliburton used its first-quarter earnings call to do justthat.

Halliburton: 'Things havechanged quite a bit'

"Thiswas truly a great deal, one that was unanimously approved by each company'sboard of directors and overwhelmingly approved by each company's shareholders,"CEO David Lesar said. "Unfortunately, things have changed quite a bitsince we signed the merger agreement."

Lesarsaid both sides "completely understood" that the size of the dealwould draw regulatory scrutiny and were prepared to do what was necessary toobtain federal approval. The efforts of both companies, however, were notdeemed sufficient by the U.S. or the European Union. The DOJsued to stop themerger, while the EU delayed its review of the deal several times as it awaitedmore information.

"Wecontinue to believe the proposed Baker Hughes transaction would have beencompetitive, but our proposed divestitures were more than sufficient to addressany regulatory concerns and that the position taken in the U.S. Department ofJustice's lawsuit and the European Commission's statement of the objections areincorrect," he said. "We also continue to believe that thetransaction would be good for the industry and customers, particularly now, ata time when customers are focused on lowering cost per barrel of oil equivalent.However, the DOJ's lawsuit and EC statement of objections, combined with theelongated review process in all jurisdictions, created substantial hurdles withrespect to timing and deal certainty."

Lesarsaid Halliburton and Baker Hughes had proposed a divestiture package worthbillions of dollars to that would have allowed for the entry of new competitioninto the market, but the DOJ deemed it insufficient. In addition, he said, theoil and gas price collapse made it difficult for the two companies to get afair price for the assets they were attempting to sell.

"Giventhe abrupt and deep downturn in the oil services market, we were unable toobtain adequate value for the businesses we proposed to divest. This, coupledwith the decline in each company's business, eroded the expected synergies andaccretive aspects of the transaction, including the timeline to integrate thebusinesses to levels which we believe severely undermined the originallyanticipated synergy benefits of the deal," he said. "It became clearthat continuing to pursue the transaction was no longer in the best interest ofour stockholders, despite having to pay the termination fee to Baker Hughes.Moving forward with the transaction did not make sense in light of theelongated regulatory scrutiny, the projected time lines for closing thetransaction, the poor deal economics and the current market environment."

Duringhis comments, Lesar appeared to indicate that making another major move is noton the horizon for Halliburton.

"Weplan to scale up our product service line capability by addressing one productline building block at a time through internal growth, investment and selectiveacquisitions," he said. "Going forward, we will strive to deliver thesame predictable, reliable execution and industry-leading growth, margins andreturns from our world-class employees and management team."