As Attorney General [Loretta E.] Lynch just told you, today the Department of Justice filed an antitrust case asking the U.S. District Court in Delaware to block Halliburton’s proposed acquisition of Baker Hughes.
Halliburton is the largest oilfield services company in the United States and proposes to acquire its fierce rival, Baker Hughes. Along with Schlumberger, these companies are the “Big Three” in this business because they are by a wide margin the three largest globally integrated oilfield services companies.
Indeed, over 90 percent of Halliburton’s revenues derive from products and services that are also sold by Baker Hughes. The same is true for Baker Hughes’ revenues. Over 90 percent of its revenues come from markets where it competes with Halliburton. It is not surprising, therefore, that our investigation revealed serious antitrust problems in numerous markets representing billions of dollars of revenue. We found 23 product and service markets where the merger would cause a substantial lessening of competition. The antitrust problems here encompass most of the major steps needed to explore formations, to drill oil and gas wells, and to complete those wells. These products and services include directional drilling, drill bits, fluids, cementing, sensors, safety valves and other “tools” that are essential to energy exploration and production.
In many of these markets, the merger would leave the industry with just two dominant suppliers – a virtual duopoly. Look at the market share chart attached to our press release. In eight of the markets alleged in the complaint, the post-merger Halliburton and Schlumberger would have over 90 percent of U.S. sales. In nine other markets, two firms would have a combined share above 70 percent. And in two of the markets – offshore stimulation vessels and offshore liner hanger systems – the merged Halliburton alone would have a share above 80 percent. I have seen a lot of problematic mergers in my time. But I have never seen one that poses so many antitrust problems in so many markets.
But the problems with this proposed merger are even greater than these share numbers indicate. Halliburton and Baker Hughes, along with Schlumberger, drive innovation in these markets, often leading the way in developing next-generation technology to solve the most challenging problems facing the oil and gas industry. Take Baker Hughes, for example. Our complaint notes that it has hundreds of active research projects and launched 160 new products in 2014 alone, which generated over $1 billion in revenue. The Big Three are unique in so many respects. They often are the only suppliers qualified to bid on the most challenging projects involving offshore wells or deep onshore wells where products must function in high temperatures and at high pressures.
Competition in the oilfield services industry is critical to our economy. Competition leads to safer ways to extract oil and gas, to more efficient methods for drilling and it keeps down the cost of producing a barrel of oil. The American public cannot be asked to bear the risk that these benefits will be lost.
Our complaint understandably addresses the harm that this proposed merger would have on competition in the United States. But it is important to note that these companies compete with each other internationally, and this merger is the subject of investigations about its effects on competition in multiple jurisdictions, including Europe, Australia, Mexico and Brazil. As is our normal practice, we have been cooperating with other jurisdictions. Each will make its own decision on the merits of this deal, when Halliburton and Baker Hughes have complied with the requirements in each of those regimes. And that may take some time. For example, in Europe the merging parties have repeatedly failed to provide the European Commission with all the information it needs to move forward with its decision-making.
Our lawsuit should surprise no one, least of all these two companies. When they headed down the road to this merger, they knew they faced potentially insurmountable antitrust risk. As early as November 2014, Baker Hughes’ CEO wrote to Halliburton’s CEO that the proposed merger would “raise significant issues under the antitrust laws of the United States and other jurisdictions” and concluded that it was “unclear whether there are workable solutions” for the antitrust risk.
In the face of that knowledge, Halliburton prevailed upon Baker Hughes to undertake this risky venture only with a threat and some promises. The threat was of a costly and disruptive hostile takeover battle. To secure Baker Hughes’s agreement to go forward – notwithstanding the antitrust risk – Halliburton promised three things: (1) a premium on the price of Baker Hughes’ shares, (2) a commitment to divest assets representing up to $7.5 billion in sales and (3) a reverse breakup fee payment to Baker Hughes of $3.5 billion if the merger could not be completed.
Baker Hughes and Halliburton claim they negotiated a deal that benefits their respective shareholders. We do not know whether they are right or wrong on that. But, we do know this: they cannot strike a deal that enhances shareholder value at the expense of competition. Yet, that is exactly what they have done here and that is why we today are filing this injunction action.
Now, Halliburton has been claiming publicly from day one that it can fix any and all competition concerns, here in the United States, in Europe and around the world. At their request, and to be fair to them, we held off on this lawsuit and looked long and hard at what they put on the table. And, 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. Halliburton’s various proposals – and those have been a moving target – involve selling a grab bag of assets in certain product lines.
What Halliburton proposes to sell off or license fails to maintain today’s competitive dynamic. It turns the Big Three into a Big Two, here and around the world. Halliburton mostly would keep the more successful product lines and sell assets related to the less successful product lines to some third party. But beyond that, Halliburton would withhold – keep for itself – critical company-wide assets and personnel that support those product lines, because these common assets are shared with other parts of Halliburton or Baker Hughes. They are keeping the infrastructure essential to making each firm successful and just selling off some pieces. It is like selling part of a building while removing the heating system, the electrical wiring and some of the foundation.
Moreover, it involves agreements where the merged Halliburton would be acting on behalf of the buyer of this grab bag of assets for the foreseeable future. Contracts and licenses would not immediately be conveyed to the new owner. Customers cannot be compelled to work with a new supplier, so a complicated and lengthy customer-by-customer negotiation would be required. Halliburton also would hold back certain intellectual property used by the divested product lines and would limit the uses to which other IP could be put. And consider this: Halliburton would be transferring less than half of over 400 facilities currently used or relied upon by the divestiture assets. This means there would be enormously disruptive relocation of employees, equipment and, in some cases, major operations to new facilities. At the end of the day, Halliburton’s purported settlement would eliminate a formidable rival – Baker Hughes – and replace it with a smaller, weaker rival that is not the equivalent of Baker Hughes today.
And here is another huge problem. Halliburton’s proposed remedy would require the Justice Department and the court to devote substantial resources over many years to supervise the remedy in an attempt to see that it works. Halliburton’s proposed remedy is so complicated and convoluted that it would require unprecedented resources to oversee it. Halliburton’s purported “fix” would turn the Antitrust Division into an energy sector regulator, rather than a law enforcement agency. That is not our job. Nor is it an appropriate burden to impose on a federal district court judge.
As you know, we in the Antitrust Division do in appropriate circumstances negotiate solutions to otherwise anticompetitive mergers. But those settlements typically involve limited, discrete and clean divestitures. And that does not mean every merger can be fixed. Many cannot. And certainly not this one, where the anticompetitive concerns are pervasive, the affected markets are numerous and any remedy would be incomplete, complex and risky. Customers and competition should not have to bear the risks of a failed or inadequate remedy. For these reasons, we are asking the court to issue a full-stop injunction to block this anticompetitive merger and preserve competition in the oilfield services industry.
Before taking questions, I want to acknowledge the hard work of the team working on this matter, led by Chief Kathy O’Neill of the Antitrust Division’s Transportation, Energy and Agriculture Section and by Assistant Chief Jeff Wilder of our Economic Analysis Group.