Halliburton (HAL) and Baker Hughes (BHI) were expected to merge seamlessly, but trade regulators stopped the merger in its tracks. The two companies have been slumping all week on the news despite Baker Hughes coming out the clear winner of the failed deal.
A few reasons why both companies are slumping on the week include:
1. Halliburton Paid $3.5 Billion in Break Up Fees
Halliburton had to shell out $3.5 billion to Baker Hughes in break-up fees. The company’s investors are understandably not happy with the $3.5 billion loss. Baker Hughes is a much stronger company thanks to the $3.5 billion in free cash infusion.
2. Halliburton Was Overconfident
Halliburton’s leadership has been given a big question mark from investors. A $3.5 billion break-up fee can’t be overlooked, and many point to the leadership in the company being too confident that the merger would pass regulatory hurdles.
The company still remains in good financial condition and is still a stronger company than Baker Hughes.
3. Baker Hughes Future is Uncertain
A $3.5 billion cash infusion doesn’t help alleviate the fact that there is a big question mark looming over Baker Hughes. The company was planning its future around the merger with Halliburton to some extent, and now that the deal has fallen through, investors are wondering where the company’s future is headed.
Baker Hughes does plan to use the cash, at least in part, for share buybacks. The “free” money that the company has been given will allow Baker Hughes to boost return value to shareholders. With energy stocks in a major slump, it’s an opportunistic time for the company to buyback shares.
4. Lost Competitive Edge for Both Companies
Halliburton and a Baker Hughes merger would have given the combined companies a competitive edge over the competition. While the initial gut feeling is that a competitive edge is lost, many analysts believe that both companies will remain stronger in the long-term following the failed merger.
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