Halliburton (NYSE: HAL) and Baker Hughes Inc. (NYSE: BHI) are in merger talks that would create a formidable service company, though they would likely need to shed business segments because of overlap.

Baker Hughes confirmed Nov. 13 that it has engaged in preliminary discussions with Halliburton that may lead to a transaction.

Globally, a combination of Halliburton and Baker Hughes would create duopolies, said James Crandell, managing director, Cowen and Co.

Both service companies are in the top three in global market share in 10 separate product lines and in a majority of them their combined share would be at least one-third of the global market.

“Halliburton and Baker Hughes overlap in 11 businesses,” Crandell said. “The market segment that may be the most problematic is completion equipment and services where the two companies are dominant with a combined 54% share.”

While a Baker Hughes-Halliburton combination would create a powerful company, it would make up only slightly more than half the scale of reigning leader Schlumberger (NYSE: SLB), which has a $127.6 billion market cap, said Mark Brown, analyst, Global Hunter securities.

Nov. 14 share prices put Baker Hughes and Halliburton’s combined market cap at about $74 billion, after a 15% increase in reaction to news reports of a possible deal.

Halliburton is also likely to be heavily scrutinized since it has historically been no friend of the political left. A merger would likely undergo a strenuous antitrust review under the Hart-Scott-Rodino Act.

“There is likely to be a heavy review on the deal perhaps prompted by the current administration,” Crandell said. “This could be prompted by complaints from oil company customers.”

Crandell said the companies would need substantial divestitures to move forward.

“One should consider that Halliburton and Baker Hughes have already put a lot of work into it and have probably retained some of the best anti-trust lawyers in the country,” he said.

Divestitures could put attractive properties on the market for companies such as National-Oilwell Varco Inc. (NYSE: NOV) and General Electric (NYSE: GE). A merger could also cause further consolidation among secondary players.

Brown said that in completions equipment and services, Baker Hughes and Halliburton are likely the two leaders.

“But this market consists of numerous discrete products that we believe may be viewed separately in an anti-trust evaluation,” he said.

Halliburton would benefit from a merger in several areas, such as enhancing its completion tools offerings, improving Halliburton’s directional drilling and drill bit offerings and gives the company an opportunity for cost savings of at least $600-750 million.

“The deal would significantly strengthen two of HAL's weaker areas, artificial lift and production chemicals, combine complementary capabilities in other areas and enhance HAL's completion tools offerings,” said Stephen D. Gengaro, analyst, Sterne Agee.

Artificial lift and production chemicals are critical to enhancing Halliburton's mature field strategy, he said.

In drill bits, Baker Hughes and Halliburton are also both among the top three and perhaps this is an area where one of the companies would have to divest its position if it came under regulatory scrutiny, Brown said.

“We believe both are also in the top three for logging while drilling (LWD), but SLB is too dominant to raise any concerns, in our view,” he said. “Based on our preliminary read, we believe the transaction would pass muster on anti-trust grounds. The companies may need to determine a workaround in certain product lines, however.”

The timing of a merger seems opportune given that Baker Hughes is trading at discounted valuations compared to historical prices.

David Lesar, Halliburton’s chairman, president and CEO, has long been a proponent of scale and international content.

“Depending on what he is able to keep, this would certainly add to the scale of the company,” Crandell said. “While Baker Hughes is a factor in most international markets, overall it is weaker than Halliburton internationally. In our view, the creation of a global duopoly with Schlumberger would bring about lower costs overall and better pricing.”

Baker Hughes is a leading supplier of oilfield services, products, technology and systems with 61,000 employees working in more than 80 countries. Founded in 1919, Halliburton is one of the world’s largest providers of products and services to the energy industry and employs more than 80,000 people.