Nearly a year and a half after the deal was announced, on April 6, 2016, the U.S. Department of Justice (DOJ) challenged Halliburton's proposed $35 billion acquisition of rival oilfield services provider Baker Hughes. The DOJ reportedly rejected the companies' repeated attempts to remedy the antitrust concerns associated with the transaction through a series of concessions and divestitures—marking the latest chapter in the broader focus on and increased scrutiny of potential remedies to a transaction's competition concerns by U.S. antitrust agencies.
An Acquisition Fractured
From the outset, Halliburton's proposed acquisition of Baker Hughes was viewed as having significant antitrust risk, including by the parties themselves. As reported in the DOJ's complaint, early on, Baker Hughes's CEO expressed serious concerns with the antitrust risks, remarking that "a combination of Halliburton and Baker Hughes will raise significant issues under the antitrust laws of the United States and other jurisdictions. . . . It remains unclear whether there are workable solutions that appropriately address the antitrust risk."1 Indeed, the DOJ alleges that Baker Hughes agreed to take on this risk only "by threatening a damaging hostile takeover bid and by offering a premium on the price of Baker Hughes' shares, a commitment to divest assets representing up to $7.5 billion in sales, and a reverse breakup fee of $3.5 billion if the merger could not be consummated."2
Assistant Attorney General (AAG) Bill Baer described the transaction as "unprecedented" with respect to the "breadth and scope of competitive overlaps and antitrust issues" it presented.3 The DOJ alleged the transaction would:
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result in a loss of competition in 23 different product markets, affecting every level of the oil exploration, development, and production process;
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lead to a duopoly, leaving Halliburton and its competitor Schlumberger as the only remaining, globally-integrated oilfield service firms in operation; and
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threaten innovation, pointing to each company's annual investment of nearly $500 million in R&D, Baker's introduction of 160 new products in 2015, and the thousands of patents held by each company. The DOJ noted that without each other's "head to head" competition, the companies would have fewer incentives to invest in new technologies and research.4
When announcing the lawsuit, AAG Baer concluded, "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."5
The Well of Remedies Runs Dry
In response to these competitive concerns, Halliburton and Baker Hughes offered to divest assets across different business lines, including assets from Halliburton's drilling and drill bits businesses and assets from Baker Hughes' fluids, completions, and cementing businesses. But the proposal did not allay the DOJ's concerns and the DOJ criticized that even with the proposed remedy:
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the company would retain the most valuable assets;
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many of the divested assets would require a buyer to reach support agreements with Halliburton to successfully operate them, leaving the buyer dependent on its rival;
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the company's offer of non-exclusive licenses for certain intellectual property and numerous contractual restrictions would interfere with effective transfer or assignment of divestiture technology licenses or customer contracts; and
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the DOJ would need to remain deeply involved for years to come, monitoring and enforcing one of "the most complex and riskiest remedies ever contemplated in an antitrust case"6
Drilling Down Further on Merger Remedies
The DOJ's challenge is unsurprising when viewed in the context of the emphasis on "meaningful" merger remedies by antitrust agencies.7 Indeed, merger remedies have been a focus of AAG Baer since the late 1990s when he was Director of the Bureau of Competition at the Federal Trade Commission (FTC) and that agency conducted a study of the effectiveness of past merger settlements—a study that is currently underway again at the FTC.8
Moreover, two recent, high-profile merger remedy failures are weighing on the agencies and influencing their review of proposed merger remedies. In both instances—one in the retail grocery industry and the other in the rental car business—buyers of divested assets quickly went bankrupt. Just last year, in connection with the merger of grocery retailers Safeway and Albertsons, the FTC required the parties to divest 168 stores, 146 of which were purchased by Haggen, a local grocery chain in the Pacific Northwest.9 Haggen immediately struggled with the massive expansion and within nine months filed for bankruptcy protection; nearly all of those stores were ultimately re-purchased by Albertsons.10 In 2012, the FTC similarly required Hertz to divest its Advantage Rent A Car business as a condition for approval of Hertz's $2.3 billion acquisition of Dollar Thrifty.11 Within four months, Advantage filed for bankruptcy.12
Against this backdrop, the agencies are scrutinizing any potential remedies to ensure that divestitures are "limited, discrete, and clean"13 and that buyers are not dependent on the merged company in any relevant way.14 At the end of the day, the agencies want to ensure that any divestiture buyer will function as a bona fide competitor of the merging parties, and will "step into the shoes" of the eliminated competitor.15 Behavioral remedies, such as company commitments to act or refrain from acting in some fashion, must be easy to monitor and enforce.16
Identifying acceptable remedies may be particularly challenging for companies in consolidating industries where the number of buyers for divestiture assets may be limited or in transactions that do not allow for straightforward divestitures. It is clear, however, that the agencies' continued scrutiny of remedies means that companies need to consider early on the likely antitrust risks and consider any potential resolutions with far greater specificity.
