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Oilfield Services: No Merger, No Problem

04/08/2016 9:25 am EST


Michael Berger

President & Founder,

Although the Department of Justice filed a lawsuit to block Halliburton’s proposed takeover of Baker Hughes, Michael Berger of highlights why he still sees upside in shares of both companies at current levels.

After the Department of Justice filed suit to block Halliburton’s (HAL) proposed takeover of Baker Hughes (BHI), both companies saw their share price move higher and we see further upside from current levels.

The lawsuit reveals just how unlikely the Justice Department views the combination of the two companies. The DOJ's stance is that the merger of the two companies would substantially reduce competition and the divestitures are an insufficient remedy.

Leaves the Buyer Dependent

The Department of Justice said the combination would substantially lessen competition across a broad spectrum of product and service lines.

Moreover, the merger would leave the buyer dependent on Halliburton for services that are crucial to the businesses being divested and these product lines would fail to replicate the competition.

Assistant Attorney General Baer said, “The more we looked, the more we became convinced that this deal is unfixable. Halliburton wants the United States to agree to the most complicated array of piecemeal divestitures and entanglements that I have ever seen.”

Both Stock Possess Upside

Although the combination of the two companies would have been a catalyst for shareholders, we remain favorable on both BHI and HAL due to our bullish long-term outlook on North America's energy services market.

Baker Hughes is left with a company with an incredibly well financed balance sheet and continued attractiveness from an acquisition standpoint. BHI shareholders stand to benefit from the Justice Department’s break up of this merger. Under the terms of the merger agreement, HAL must pay a $3.5 billion termination fee should the deal not close, which comes out to about $5 per share.

Even after accounting for the substantial termination fee, Halliburton is one of the cheapest stocks in the energy services market. While the $3.5 billion termination fee will be a headwind for the company, in anticipation of the merger this has already been financed through the company’s recent debt offering.

Furthermore, Halliburton’s operations focus on North American completions and the company’s best-in-class NAM supply chain should help the company rapidly scale activity and margins in a recovery.

By Michael Berger of

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