The colossal merger between Halliburton Co. (NYSE: HAL) and Baker Hughes Inc. (NYSE: BHI) is on the skids after the U.S. Department of Justice (DOJ) filed a civil lawsuit April 6 citing the deal’s threat to oil and gas competition, prices and innovation.

Some analysts predict the deal may not survive as U.S. and European Union officials look into the deal. Halliburton and Baker Hughes vowed to fight the suit, citing efforts to divest more than $7.5 billion in business lines. But Raymond James analyst J. Marshall Adkins said “at this point, we do not expect the deal to be completed.”

The DOJ’s complaint contends that the acquisition—which the companies initially valued at $34.6 billion when announced in 2014—would combine two of the three largest oilfield services companies in the U.S. and the world, eliminating important head-to-head competition in markets for 23 products or services used for onshore and offshore oil exploration and production.

The lawsuit, filed in the U.S. District Court in Delaware where both companies are incorporated, says the effect of the transaction would “tend to create (a) monopoly” and put at risk the economy, consumers and producers.

“Our action makes clear that the Justice Department is committed to vigorously enforcing our antitrust laws,” Attorney General Loretta E. Lynch said in an April 6 press release. “In the days ahead, we will continue to stand up for fair deals and free markets.”

The DOJ called the transaction unprecedented in its breadth and scope of competitive overlaps and antitrust issues.

Assistant Attorney General Bill Baer of the department’s Antitrust Division said Halliburton and Baker Hughes compete to invent and sell products and services that are critical to energy exploration and production.

“We need to maintain meaningful competition in this important sector of our economy,” Baer said.

Approval Pending

The companies say they will “vigorously contest” the DOJ’s efforts to block the merger, according to a joint statement. In addition to the DOJ action, the companies are also engaged in a Phase II review by European Commission officials.

Halliburton and Baker Hughes shareholders have already approved the deal, and regulatory agencies in Canada, Colombia, Ecuador, Kazakhstan, South Africa and Turkey have already signed off.

“The companies believe that the DOJ has reached the wrong conclusion in its assessment of the transaction and that its action is counterproductive, especially in the context of the challenges the U.S. and global energy industry are currently experiencing,” Halliburton and Baker Hughes said.

Yet, even Halliburton and Baker Hughes foresaw potential red flags.

The DOJ’s suit notes that Halliburton CEO David Lesar wrote to Baker Hughes CEO Martin Craighead in early November 2014 that “we have both agreed that a combination of Halliburton and Baker Hughes will raise significant issues under the antitrust laws of the United States and other jurisdictions.

“It remains unclear whether there are workable solutions that appropriately address the antitrust risk and the completion risk.”

The two companies are each giants in the industry.

Halliburton operates in about 80 countries and employs roughly 65,000 people. In 2015, it earned revenues of $23.6 billion and invested $487 million in research and development. It owns thousands of patents relating to oilfield technologies.

Baker Hughes operates in more than 80 countries, employs 43,000 people and earned revenues of $15.7 billion in 2015. It invested $483 million in research and development in 2015 and owns thousands of patents relating to oilfield technologies. In 2014 alone, Baker Hughes introduced 160 new products and generated $1 billion from new products in its first 12 months of commercialization.

Halliburton and Baker Hughes said their merger is “pro-competitive and will allow the companies’ customers to benefit from a more flexible, innovative and efficient oilfield services company.”

The transaction provides customers access to high quality and more efficient products and services, and an opportunity to reduce their cost per barrel of oil equivalent, the statement said.

Too Much?

In the summer, Halliburton and Baker Hughes responded to a second DOJ request for additional information regarding the merger following disclosures made in February 2015.

Early in the process, Halliburton said it proposed a divestiture package worth billions of dollars that will facilitate the entry of new competition in markets in which products and services are being divested. In September, the companies said they would divest additional assets. Combined, the company said 2013 revenue associated with the proposed sales was $5.3 billion.

“Both companies strongly believe that the proposed divestiture package, which was significantly enhanced, is more than sufficient to address the DOJ’s specific competitive concerns,” the companies said.

The DOJ’s suit contends that the terms of Halliburton’s divestitures appear “to be among the most complex and riskiest remedies ever contemplated in an antitrust case.”

“The divestitures would separate business lines and divide facilities, intellectual property, research and development, workforces, contracts, software, data and other assets across the world between the merged company and the buyer of the divested assets,” the suit said.

Selling the assets would leave buyers dependent on Halliburton for services “crucial for the business being divested.”

The suit says the merger would cause several business lines to impose at least a small but significant, non-transitory increase in prices. If such a condition exists, analysis can be conducted to see whether a company has too much market power.

Halliburton and Baker Hughes said they plan to demonstrate that the DOJ has underestimated the highly competitive nature of the oilfield services industry and benefits of the proposed combination.

“Once completed, the transaction will allow customers to operate more cost effectively, which is especially important now due to the state of the energy industry and oil and gas prices,” the companies said.

Halliburton and Baker Hughes said they look forward to an impartial judicial review of the pending transaction, including the sufficiency of the proposed divestitures.

Halliburton and Baker Hughes previously agreed to extend the time period to obtain regulatory approvals to no later than April 30, as permitted under the merger agreement. If the judicial review extends beyond April 30, the parties may continue to seek relevant regulatory approvals or either of the parties may terminate the merger agreement.

Always More Fish

Should the deal fall through Halliburton remains one of the cheapest stocks in Raymond James’ coverage given its exposure to the U.S. market and any recovery. However, Halliburton will be responsible for a $3.5 billion termination fee.

The company would be positioned to eliminate up to $350 million in additional annual costs on hold because of the merger.

From Baker Hughes’ perspective, “the market is already pricing in a deal failure and we see downside as limited and value upside from the ability to cut costs, an impressive balance sheet post termination payment and the fact that the company remains an acquisition target,” Adkins said.

The company has been underspending compared with what is necessary to fully upkeep equipment, Adkins said. “The company is likely only replacing parts and spending to maintain or replace revenue generating equipment today,” he said.

However, the $3.5 billion cash breakup fee from Halliburton would infuse capital into the company and bring its pro forma net cash position, after debt and taxes, to $600 million.

Darren Barbee can be reached at dbarbee@hartenergy.com.