Tara Lachapelle New York
Of all the mega-mergers announced this year, Halliburton’s $35 billion (R338bn) takeover of Baker Hughes is promising the most aggressive cost cuts.
Halliburton, an oilfield services provider, says it can slash $2bn after acquiring its similar-sized rival. That is the biggest estimate of any deal valued at $20bn or more that has been announced this year, according to Bloomberg data. Even deals twice its size – such as Comcas’s purchase of Time Warner Cable and Actavis’s merger with Allergan – are projecting fewer synergies.
The term synergies is investment banking jargon for how much money can be saved from firing people with overlapping responsibilities and eliminating other redundancies that come from combining two businesses.
Halliburton shareholders are not yet convinced that its estimate is feasible. They dumped the stock on Monday, resulting in a 11 percent drop in the price. The decline, which also reflected regulatory concerns and an unusually large break-up fee, is an anomaly in a year when most acquirers have surged alongside their targets. “These synergies are aspirations which can turn into justifications for the deal price,” said Erik Gordon, a business professor at the University of Michigan. “Then you get the deal closed and see what you really can do without destroying your company.”
For Halliburton and Baker Hughes, “some part of that $2bn will be a hard number that they know they can do, and the other part is an aspirational guess”.
Investors tended to be more forgiving when companies did not fully achieve synergy projections than when they missed earnings estimates, Gordon said.
Still, the challenge was that synergies became more important and much harder to get during a downturn in a cyclical industry such as oil, he said.
Halliburton and Baker Hughes are merging amid plunging crude prices, which have dropped to a more than four-year low.
The deal eliminates one of Halliburton’s chief rivals, creating a more formidable competitor against market leader Schlumberger. Halliburton also will gain access to Baker Hughes’ technology to boost production in ageing wells and its prized oil-tools business.
Halliburton said much of the $2bn of annual cost synergies would come from operational improvements and reorganising personnel, as well as eliminating overhead and other fixed costs. Chief financial officer Mark McCollum called it a “conservative estimate” and suggested there could be more should regulators go easy on them in terms of necessary divestitures.
Even so, shareholders are hedging the risks. Halliburton and Baker Hughes had a combined market value of $72.6bn at the end of last week, before the merger was officially announced and the terms were disclosed. – Bloomberg