AfterBaker Hughes Inc. andHalliburton Co.called off their hotly contested merger, the two companies have to figure outwhat lies in store as they resume their roles as competitors.
"Whileboth companies expected the proposed merger to result in compelling benefits toshareholders, customers and other stakeholders, challenges in obtainingremaining regulatory approvals and general industry conditions that severely damageddeal economics led to the conclusion that termination is the best course ofaction," Dave Lesar, Halliburton's chairman and CEO, said in a May 1 jointstatement. "While disappointing, Halliburton remains strong. We are theexecution company — our strategy, technologies and service quality are focusedon helping customers maximize production at the lowest cost and drivingindustry leading growth, margins and returns."
MartinCraighead, chairman and CEO of Baker Hughes, said his company was equally disappointedby the outcome but understood the difficulties the merger faced.
"Thiswas an extremely complex, global transaction and, ultimately, a solution couldnot be found to satisfy the antitrust concerns of regulators, both in theUnited States and abroad," he said in the statement.
Themerger agreement expired April 30, and a day later, the two sides publiclyannounced what many analysts had deemed inevitable. The merger had been opposed bythe U.S. Department of Justice and the European Union.
Aspart of the deal, agreed to in November 2014 and valued at the time at $34.6billion, Halliburton will pay Baker Hughes a termination fee of $3.5 billion byMay 4.
In aseparate statement May 2, Baker Hughes gave an indication of how it plans toproceed, including cutting back on its operations.
"Inan effort to improve its return on invested capital the company has decided toretain a selective footprint in its U.S. onshore pressure pumping business,while preserving the flexibility to expand for the right opportunities,"the company said. "This approach will allow the company to achievecash-positive operations in a capital-intensive segment that is expected toremain challenging due to overcapacity, commoditized pricing and low barriersto entry."
BakerHughes said it was also taking "immediate steps to remove significantcosts" that were retained as part of the former merger agreement that itnow intends to jettison.
"Inaddition to removing those previously disclosed costs, the company isevaluating broader structural changes to further significantly reduce costs andimprove efficiency, which will allow it to better serve the rapidly shiftingglobal market," the company said. "The initial phase of the costreduction efforts is expected to result in $500 million of annualized savingsby the end of 2016."
Analyststook a skeptical view of Baker Hughes' plan, as many appear to believe thecompany lacks sufficient capital even with the $3.5 billion payout fromHalliburton.
"Wethink it'll be harder for Baker to pull itself together and then to continue tobe a viable global competitor," Jefferies analyst Brad Handler said. "Wethink it still has investments to provide goods and services consistently,reliably across the globe as is required by a major diversified oil-fieldservices company. We could have said the same thing in 2014. It was makingheadway and has invested a lot since 2010, but it has much more to do, and nowis not that time to do it."
FBRanalysts Thomas Curran and Mark Kelley said in an investors note May 2 thatBaker Hughes may still be a takeover target.
"[BakerHughes could] become a high potential M&A candidate for others, offering,from a straight takeout perspective, the most compelling industrial value to GEOil & Gas, in our view," they said.
Halliburtonsaid it will reveal its plans during a conference call May 3. The odds of itattempting to pull off another major acquisition, however, appear to be fairlyslim.
"Wethink it will be more like their current form. They may try to explore ways toget at more production-based businesses, but we think Halliburton will look alot more like it does today than chasing after another big acquisition,"Handler said. "In this deal, there was a combination of goals, includingmarket consolidation, as well expanding product lines. I think there aren'tmany other companies built like Baker."