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Will Baker Hughes merger with GE unit end up like Halliburton deal?

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Written by James Osborne

Click HERE to Ready the Article by the Publisher.


WASHINGTON – When attorneys for GE Oil & Gas and Houston’s Baker Hughes go before the Justice Department in support of their $32  billion merger, they will need to convince officials they have avoided the antitrust problems that doomed the proposed combination of Baker Hughes and Halliburton earlier this year.

Analysts say they might have an easier time than Halliburton since the Baker Hughes and GE Oil & Gas have little overlap in energy services markets. While Baker Hughes, for example, might drill a well, GE would supply the wellhead and blowout preventer.

In contrast, Halliburton and Baker Hughes competed in many of the same markets, and their combination would have given the merged company dominant shares, creating a duopoly with the world’s biggest oil field services company, Schlumberger. The Justice Department estimated the European company Schlumberger and a merged Halliburton-Baker Hughes would have controlled up to 90 percent of some markets and increased prices for its customers.

“There is some overlap (with the GE merger), but there’s certainly a lot less than Baker Hughes and Halliburton,” said Eric Ause, senior director or corporate finance at Fitch Ratings. “In Fitch’s view, there’s some regulatory risk but it’s not as great as the Halliburton transaction.” (The Hearst Corp., the parent company of the Houston Chronicle, is the majority owner of Fitch.)

The $35 billion merger of Halliburton and Baker Hughes, both of Houston and respectively the world’s second and third energy services companies, was scrapped about six months ago when it became clear that the deal would not gain regulatory approval. The Justice Department, which filed suit to block the merger, did not respond to a request for comment on the GE-Baker Hughes deal.

One possible sticking point

But one potential area of scrutiny are those services in which the two companies currently compete. Both GE Oil & Gas and Baker Hughes supply water treatment systems critical for oil and gas drillers operating in arid environments like West Texas. Both also produce the chemical cocktail known as “fracking fluid,” used to draw oil and gas to the surface during hydraulic fracturing.

Inside the two companies, attorneys are already considering the possibility the Justice Department could force them to sell off the assets of businesses in which they compete. On Monday, GE said it was selling its water division, a decision at least in part based on avoiding regulatory scrutiny, executives said.

In their merger announcement Monday, GE and Baker Hughes said they were, “committed to working constructively with the relevant government regulators to achieve the necessary approvals.”

While financial analysts largely down played the possibility of the Justice Department moving to block the merger, they also admitted it was still early stages.

“There’s been a few of these transactions where everything seemed okay,” but the Justice Department objected, said Robert Schulz, a credit analyst with S&P Global Ratings. “There might not be huge amounts of overlap here, but there’s always the chance (federal) officials’ will look at things in a different way.”

Darren Bush, an antitrust law professor at the University of Houston, compared Baker Hughes’ potential merger with GE Oil & Gas to the pending deal between telecommunications giant AT&T and content provider Time Warner. In each case, the merging firms largely operate in different markets, but have businesses that complement each other.

Companies on different levels

The antirust issues in such mergers is not whether the combined company would dominate a particular market, but rather if it could use one part of its business to give an unfair advantage to the other.

For example, some antitrust specialists worry that AT&T could use its vast distribution network to provide favorable treatment and lower costs to programming from Time Warner to the detriment of competitors.

Likewise, the new Baker Hughes – as the companies referred to the combined entity Monday – could potentially use pricing on critical production equipment manufactured by GE to force clients away from rivals like Halliburton and Schlumberger, Bush said.

“You’re talking about two companies that play on different levels of an industry,” he said. “The question regulators will be asking is will the acquisition give (the new company) the incentive to foreclose markets.”

If approved, the new Baker Hughes, which would be majority owned by Boston-based GE, would add a third strong player to an oil field services industry that was increasingly dominated by two firms, Schlumberger and Halliburton. Executives of GE Oil & Gas and Baker Hughes said the combined company would surpass Halliburton in revenues and number of employees.


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Written by James Osborne

Click HERE to Ready the Article by the Publisher.

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