Introduction
Varied reasons motivate a firm to acquire other entities. Firms acquire others as a form of investment, which is expected to generate future returns. The main objective of firms is to maximize the shareholders’ capital, and thus companies acquire others for the same reason. Halliburton is one of the world largest multinational oil companies with it headquarters at Houston, Texas. Halliburton has more than 80 subsidiaries worldwide. Halliburton deals with petroleum and natural gas as its major market segment.
In 2014, the company’s shareholders voted unanimously to approve a merger with its major rival, Baker Hughes. This merger was motivated by the ongoing downturn in oil prices and stiff competition in the market. It is intended to create competitive advantage to Halliburton by eliminating competition in order to take on the market leader, Schlumberger Corporation.
The deal is estimated to be $34.6 billion of the total Baker’s Hughes equity stocks (Yahoo Finance, 2015). This paper explores strategies used to merge Baker Hughes with Halliburton. It also evaluates potential mergers and acquisition that can increase Penn Virginia Oil and Gas Corporation’s shareholders value. In the second case, this paper explores and evaluates both business and corporate-level strategies of Penn Virginia Oil and Halliburton Oil and Gas Corporation.
Strategies used to merge Halliburton with Baker Hughes Oil Company
Firms can either acquire related or unrelated businesses depending on the nature of their operations. There is no evidence to support that acquisition of a related business is likely to yield more returns than acquiring unrelated entities.
This issue has elicited hot debate concerning related and unrelated businesses. Despite disagreement on the issue, Singh Mann and Kohli (2008) argue that companies are motivated to acquire others in order to expand their markets, lower production costs, reduce competition, and improve production efficiency. A strategic merger leads to synergies in terms of cost saving, production efficiency, and competitive advantage, thus creating value.
Creating value is of strategic importance to both shareholders and managers. It ensures a firm’s future profitability is secured by reducing competition and unnecessary costs. Baker Hughes is the main rival of Halliburton and merging the two will create value by reducing competition. The merger of Baker Hughes will ensure that Halliburton Oil Corporation increases sales revenue by experiencing high revenue from the merger. Halliburton managers have been in a position to identify that falling oil prices have affected many firms in the industry.
Both firms are facing financial challenges and in order to survive, they have to merge. The merger will involve the integration of Baker Hughes into a wholly owned subsidiary. Therefore, the Halliburton’s management team believes that the two firms will save an estimated $2 billion in operation costs (synergy). This integration will be settled by Baker Hughes’ shareholders receiving 1.12 shares of Halliburton and $19 in cash per share of Baker Hughes (Baker Hughes, 2015).
Halliburton and Baker Hughes arrangement is a cash stock deal. Al-Sharkas, Hassan, and Lawrence (2008) note that when oil prices dwindle, valuation goes down, thus giving large companies a strategic opportunity to acquire smaller companies in the same sector. In the late 1990s when oil prices went down below $50 per barrel, big companies acquired smaller firms (Stahl & Mendenhall, 2005). For example, Conoco merged with Phillips Petroleum and the British Petroleum acquired Amoco Corporation.
The timing of this merger is critical since smaller companies such as Baker Hughes have little capacity to absorb losses due to the global oil crisis. Baker Hughes value could be affected by many factors such as breaks fee, regulatory approval, and Halliburton confidence in the merger.
Therefore, Halliburton must be careful to ensure that it acquires the targeted firm at a positive acquisition value. In some cases, mergers may lead to poor financial and operational management. Consequently, the acquirer might regret paying a premium for the acquisition of another firm. In fact, some scholars believe that paying a premium price is not reasonable in most case. Most firms overestimate the amount of synergies to be created by mergers.
It is estimated that in most mergers and acquisitions, the acquirer pays a premium of 10-35% over the market value of the targeted firm (Moeller, 2013). Some analysts believe that Halliburton’s deal is overestimated, as they hold that the merge will only create $250 million (Bodnar, 2015). Therefore, Halliburton might be buying Hughes shares at a premium beyond a reasonable price. Moreover, some analysts believe that Halliburton is very aggressive to make the deal without considering the true value of their target (Bodnar, 2015).
The current market price, as at 17th November 2014 when shareholders agreed on the deal, was Baker Hughes (BHI) $62.67 and Halliburton (HAL) $43.36 (Bodnar, 2015). However, although there is an expected capital gain in the short term, investors are concerned that the merger is still overestimated. Furthermore, considering the 40% drop in oil prices, growth is not guaranteed. The OPEC has maintained it production, which means that oil prices are expected to fall in the future.
Therefore, in the future, it will be difficult for Halliburton and Baker Hughes to make a profit from drilling and natural gas. However, today, the proposed merger will protect Halliburton and Baker Hughes by increasing HAL market share by 23 per cent of shale drilling (Bodnar, 2015). Despite the synergies created, global forces and unforeseeable risks will outweigh the advantages.
Merger between Penn Virginia and Abraxas to create potential synergies
Mergers and acquisition is one of the most complex and risky business transactions in the contemporary times. It is estimated that over 80 per cent of mergers and acquisition fail (Bodnar, 2015). Therefore, it is critical for a business to evaluate targeted enterprise in order to ensure they add value to the company. Penn Virginia Corporation (PVA) is a gas and oil company engaged in the exploration and production of oil domestically in Eagles shale Texas (Penn Virginia Corporation, 2015). PVA can either acquire another firm in the industry when the business conditions are favorable.
Due to the current global oil crisis, Penn Virginia can potentially merge with it rival Abraxas Petroleum Corporation. A potential merger between Penn Virginia and Abraxas Corporation is likely to create synergies. Given that OPEC has declined to lower production, it is expected that the profitability of both Penn Virginia and Abraxas will shrink in the future. In order to survive, the two companies can merge to share production costs and reduce competition in the future. Continued low oil prices will distress Penn Virginia potentially, thus forcing it to either upload or sell assets to raise capital.
Some small to medium size companies that do not merge are shedding exploration assets to raise capital. For instance, Hess Corporation has sold some of its asset related to refining (Stokman, 2014). Falling oil prices will lower the value of small and some medium exploration companies to the extent where market capitalization is greater than the value of assets. In order to overcome such challenges, Penn Virginia can merge with Abraxas, which can potentially save huge operation costs (synergies).
Halliburton business and Corporate Level strategy
Halliburton is one of the best oil and gas companies in the world. This company has been in a position to retain its competitive advantage due to its ability to offer excellent quality products and services. Moreover, Halliburton’s competitive advantage stems from its ability to specialize in equipment and develop processes at low cost. This aspect has enabled the company to gain strong and loyal customer base all over its subsidizers while increasing profitability. Finally, Halliburton has been in a position to invest in research and development over the years, which facilitated the development of unique products and services.
However, Halliburton’s management can improve business performance by going beyond benchmarking in order improve the decision-making processes. Managers should connect incentive with performance to ensure accountability and increased productivity within the organization. Finally, managers should be educated on mergers and acquisitions to be in a position to evaluate such businesses based on value creation rather than isolated business opportunities.
Business and Corporate level strategies of Penny Virginia Oil Corporation
Competitive advantage is critical in the oil sector due to global falling oil prices. Penn Virginia’s management should focus on effective project execution to save cost and improve customer service delivery. In addition, Penn Virginia should focus on domestic exploration and increasing gas and oil reserves in order to compete with the rapid growing oil and gas production in the US. Moreover, the firm should also concentrate on consolidating resources in upstream operation in order to enhance long-term sustainability.
In particular, Penn Virginia should concentrate on natural gas production to meet market demand in future and to expand into a new market niche. The firm should consolidate and develop convention and non-convention natural gas in order to maintain supply and push forward profitability in the end. In order to improve innovation and take advantage of shared costs, managers should encourage joint investment in oil and gas production. By doing so, Penn Virginia will take advantage of new inventions at low cost and strengthen production in all domestic sites.
Conclusion
Mergers and acquisitions are complex to execute due to various obligations that have to be fulfilled before a final deal is reached. However, mergers and acquisitions can greatly improve a firm’s performance and especially if the proper valuation is well determined. Investors who intend to take advantage of potential mergers and acquisition must bear in mind that before a final deal is agreed upon, there is no guarantee that a final offer will be made.
Nevertheless, merger and acquisition in the oil sector such as Halliburton and Baker Hughes can greatly reduce operation costs and improve production and service delivery. Managers should invest in research and development in order to develop creative ways of producing well-refined natural gas to meet the growing market needs both in the short term and in the long term.
References
Al-Sharkas, A., Hassan, K., & Lawrence, S. (2008). The Impact of Mergers Acquisitions on the Efficiency of the US Banking Industry: Further Evidence. Journal of Business Finance & Accounting, 35(2), 50-70.
Baker Hughes: Baker Hughes announces April 2015 rig counts. (2015).
Bodnar, N. (2015). Examination of the Halliburton, Baker Hughes Merger: Part 1.
Moeller, S. (2013). Coping with Equity Market Reactions to M&A Transactions.
Penn Virginia Corporation: Penn Virginia Corporation Announces First Quarter 2015
Results and Provides Updates of 2015 Guidance and Operations. (2015).
Singh Mann, B., & Kohli, R. (2008). An Empirical Analysis of Bank Mergers in India: A Study of Market Driven versus Non-Market Driven Mergers. Journal of Financial Services Research, 35(1), 47-73.
Stahl, G., & Mendenhall, M. (2005). Mergers and acquisitions: managing culture and human resources. Stanford, CA: Stanford Business Books.
Stokman, H. (2014). Why Hess’s Spin-Off Is Exactly What The Firm Needs.
Yahoo finance: Baker Hughes Declares Quarterly Dividend. (2015).