After a short period of wooing and shoving, Baker Hughes Inc. (NYSE: BHI) agreed Nov. 17 to a $34.6 billion buyout offer of all of its shares by Halliburton (NYSE: HAL).

The merger would be transformational to the industry, though antitrust hurdles will be significant. It could trigger more M&A activity among the oilfield service participants to keep up the pace.

Potential targets include C&J Energy Services Inc (NYSE: CJES), Superior Energy Services (NYSE: SPN) and Weatherford International (NYSE: WFT), along with other smaller companies with significantly less anti-trust risk than a BHI-HAL combination, said Mark Brown, an analyst with Global Hunter Securities.

“However, the key to note is that this will be a long drawn-out process with the deal expected to close in the second half of 2015, or potentially after,” said J. Marshall Adkins, analyst, Raymond James.

To address antitrust concerns, Halliburton is willing to divest businesses that generate up to $7.5 billion in revenues if required by regulators. Halliburton thinks that the divestitures required will be significantly less. The company will also pay a fee of $3.5 billion if the transaction terminates due to a failure to obtain required antitrust approvals.

“We expect a key driver to the timing of this combination is the urgency to further reduce costs in order to be competitive if E&Ps push to retrench spending going forward,” Brown said.

The merger would combine two highly complementary suites of products and services into a comprehensive offering to oil and natural gas customers, perhaps too complimentary.

James Crandell, managing director of Cowen and Co., said oil companies will not be happy.

“Oil companies want choices, not global duopolies,” Crandell said. “There are several businesses that the combined market share of Schlumberger and Halliburton would be 65% or more [wireline, LWD, drilling fluids, drill bits, directional drilling, completion equipment and cementing].

“We think it's likely that not only will oil companies write letters to regulators but that they will increasingly award tenders to others to attempt to build up third competitors in many product lines. Weatherford International is best positioned to benefit from this.”

The merger raises some concerns about the market share a combined HAL-BHI would command. Halliburton and Baker Hughes have similar operational structures with about 50% leverage to the North American market and a robust completions portfolio centered on pressure pumping.

Baker Hughes has been under antitrust investigation since May 2013 related to pressure pumping. The company has disclosed it received a Civil Investigative Demand letter from the U.S. Department of Justice (DOJ) pursuant to the Antitrust Civil Process Act.

The DOJ wants documents and information from Baker Hughes from May 29, 2011, through the May 2013 related to pressure-pumping services in the U.S.

A HAL-BHI merger would give the company at least one third market share of seven U.S. oilfield service businesses, including hydraulic fracturing.

Hostile Takeover

The deal comes after tense negotiations that in one form or another have been on and off the table since 2005.

In early November, Baker Hughes and Halliburton haggled over price and proxy fights were threatened.

Martin Craighead, chairman and CEO of Baker Hughes, wrote Nov. 12 to David Lesar, Halliburton’s chairman, president and CEO, “Your intransigence is not a reasonable response and your demand that we accept your offer in the next four hours, and threat to conduct a proxy contest to try to control both sides of this negotiation, are entirely inappropriate,”

Craighead wrote that the price would need to come up.

“Your initial [and only] value proposal of Oct. 13 was not and is not at an adequate value level and therefore, for that reason alone, not in the best interests of the stockholders of Baker Hughes,” Craighead said. “I reiterated to you last Sunday that, after careful review, our board was concerned with value, and with certainty of closure, given the very significant antitrust risk we both see associated with the potential transaction.”

Deal Dynamics

The deal will be paid through 75% stock and $19 per share in cash. At $78.62 per Baker Hughes share Halliburton is paying a 40.8% premium to the company's closing stock price as of Oct. 10, the day prior to Halliburton's initial offer.

The merger’s enterprise value is about $38 billion, said Pearce Hammond, managing director for Simmons & Co. International. Baker Hughes shareholders will own 36% of the combined company.

The deal combines the second- and third-largest service companies in the world. Halliburton is targeting $1 billion in annual fixed cost savings through the merger.

Halliburton’s aim is for nearly $2 billion annual cost synergies.

Source: HAL, BHI

A New Company

On a pro-forma basis the combined company had 2013 revenues of $51.8 billion, more than 136,000 employees and operations in more than 80 countries around the world.

One-time integration costs are estimated to be $500 million.

Past bickering forgotten, on Nov. 17 Craighead said in a statement that the deal brings stockholders a significant premium and the opportunity to own a meaningful share in a larger, more competitive global company.

“By combining two great companies that have delivered cutting-edge solutions to customers in the worldwide oil and gas industry for more than a century, we will create a new world of opportunities to advance the development of technologies for our customers,” he said.

Craighead said that combined, the company will achieve things neither could have realized on their own.

“We are pleased to announce this combination with Baker Hughes, which will create a bellwether global oilfield services company and offer compelling benefits for the stockholders, customers and other stakeholders of Baker Hughes and Halliburton,” Lesar said. “The transaction will combine the companies’ product and service capabilities to deliver an unsurpassed depth and breadth of solutions to our customers, creating a Houston-based global oilfield services champion, manufacturing and exporting technologies, and creating jobs and serving customers around the globe.”

Credit Suisse is serving as lead financial advisor and BofA Merrill Lynch is also serving as financial advisor to Halliburton. Baker Botts LLP and Wachtell, Lipton, Rosen & Katz are serving as Halliburton’s legal counsel.

Goldman, Sachs & Co. is serving as financial advisor to Baker Hughes. Davis Polk & Wardwell LLP and Wilmer Cutler Pickering Hale and Dorr LLP are serving as Baker Hughes’ legal counsel on this transaction.