Antitrust lawyer dissects recent mergers, shares concerns on costly review process

OIL & GAS FINANCIAL JOURNAL: Sean, you've been involved in numerous mergers and acquisitions in the oilfield services sector over the past 30 years. This past year, you have won antitrust clearance for several of the industry's marquee mergers – Schlumberger and Smith International, Baker Hughes with BJ Services, and Cameron with the Natco Group. Can you explain to our readers how these mergers were good for all the companies involved, their stockholders, and their customers?

SEAN BOLAND: Each one is a little different as far as motivation is concerned. Let me start with the smallest one first, the Cameron-Natco merger. Natco makes various types of processing equipment that are used to separate oil, gas, and water. Cameron was in that business, and Natco was a competitor, but Natco had a little different bent. Natco is a manufacturer, whereas Cameron outsourced a lot of its manufacturing. So as Cameron was expanding its product line, it also wanted to become more of a manufacturer. In some countries of the world, such as Brazil, it is crucial that companies that want to do business there have local manufacturing facilities. Having this ability was crucial to a company like Cameron that wanted to sell its products to Petrobras. This is a huge developing market for Cameron. So by buying Natco, which has a wonderful reputation as a manufacturer of products, Cameron was able to meet this requirement by Petrobras and similar requirements by countries like Mexico. Very, very important to them. So that was a main driver for the Cameron-Natco deal – extending the products offered into new areas and gaining the ability to manufacture the products that they were already designing and engineering, but not manufacturing.

Was this good for everybody? Yes, I think so. Natco was a smaller company than Cameron. They didn't have the reach or the geographic scope that Cameron had. Now Cameron is going to be able to take Natco into areas of the world where they weren't competing. There will be economies of scale and efficiencies from that deal, and just extra teeth. They are going to be able to tackle much larger products together than either of them could have done separately.

OGFJ: And the Baker Hughes and Schlumberger deals?

BOLAND: Baker Hughes and BJ Services is easy to explain. Baker Hughes' major competitors – Schlumberger and Halliburton – are major pressure pumping companies. This is a critical service for an international oil service company to offer and was a hole in Baker's portfolio and becoming bigger as shale plays and similar formations have become a larger part of E&P activity in North America and elsewhere. They weren't able to participate at all in that area. It's a marriage made in heaven and I think is going to be an excellent acquisition for them.

Schlumberger was driven by a couple of things. It had sold its bit business to Grant Prideco and then Grant Prideco sold itself to National Oilwell Varco. I think Schlumberger probably regretted that they did that. One of the reasons they pursued the merger with Smith International is that they wanted to be able to develop integrated downhole assemblies so that they'd have the drill bits, the motors, the LWD, the MWD – all those things that are at the bottom of the drill string. They'd have all the pieces and they'd be able to develop integrated, more efficient drilling products. They had sold off their drill bits and they really needed them back.

Smith also had the joint venture with Schlumberger – M-I SWACO. You know, the mud business used to be a "dumb" business but it's now fairly sophisticated. Some people think that the Deepwater Horizon disaster was because of the failure to keep the mud in the hole and keep the pressure on hold. Obviously mud is a very, very important product for a lot of different reasons. M-I SWACO is a very strong player in the mud industry, so that was attractive to Schlumberger also.

And then Smith had also developed through its WH acquisition that they did a few years ago a very attractive, lower cost directional drilling company that would allow Schlumberger to offer a high-end product through the Schlumberger brand and a lower-end product through the WH brand. These were the primary reasons driving that deal.

OGFJ: What was the position of the customers on these deals?

BOLAND: I don't think there was a lot of customer opposition to any of the deals. I think the companies got out there and stated their positions, which were very coherent. Obviously they have very sophisticated customers who understood these positions and could judge whether or not this would create a problem for them. They basically saw these as good deals for them as well.

OGFJ: And how did the market respond to the deals?

BOLAND: It's hard to tell because the market has been all over the place. The stock market response probably had nothing to do with the mergers per se, but all three deals made economic sense. What may have surprised people somewhat is the premium Schlumberger paid for Smith. It was a much larger premium than, say, Baker Hughes paid for BJ just four months earlier. But, Schlumberger considered this a critical acquisition and they had no way to acquire what they wanted to acquire other than to buy Smith. Baker Hughes was in a similar position. If they wanted to get into pressure pumping, there was really only one company left and that was BJ. We had done the Western Company-BJ deal back in the late '90s, and so that industry had basically consolidated into three players. Halliburton owned one; Schlumberger owned another; and BJ was the only opportunity for Baker Hughes.

OGFJ: In your view, what is the public's interest in mergers and acquisitions? And what is the proper role of the government?

BOLAND: It's really defined in economics. What you're trying to do is improve consumer welfare, or at least ensure that consumer welfare isn't injured. Although we don't want to hurt the free market, it is sometimes necessary for the government to block deals that would result in an increase in price or a reduced supply of an important product or service. So what you're really trying to measure is whether or not these firms, when they combine in a particular market or area of competition, have enough power either individually or with their competitors in the industry to raise prices and harm consumer welfare through that price hike. The statutes that govern this area – the Sherman Act and the Clayton Act and the FTC Act – don't spell this out, but the case law that's been developed over the last 100 years or so does spell it out fairly clearly. So the agencies know what they're looking for when they analyze a merger, which is to protect consumer welfare.

OGFJ: How politicized are these agencies? Does enforcement of the antitrust laws vary much from administration to administration, from one party to another? Are the Republican appointees too lax and the Democrats over-zealous?

BOLAND: The conventional wisdom prior to the Obama administration has always been that Republicans are very tough on antitrust laws. They can't look like they are favoring big business. They believe in free markets and competition, and if somebody is getting too big and hurting competition, then antitrust enforcement in that area is consistent with what Republicans believe in. The CW is that Democrats talk tougher [about enforcement of antitrust laws] than Republicans, but they act about the same. This is generally true going back many, many years. In fact, when it comes to regulation and enforcement, you may remember that it was Richard Nixon, a Republican, who developed the Environmental Protection Agency. And I think he felt he felt that was the right thing to do. Similarly, Republicans have been very tough on anti-trust enforcement.

However, the Obama administration came in and said some very aggressive things about what they were going to do. In fact, President Obama himself said that the Bush administration had what might be the weakest record of antitrust enforcement of any administration in the last half century. Obama said his administration would be much tougher than Bush's in enforcing antitrust laws, and it has been. However, economic activity is way down, so you have to take this into account when you are looking at what they've done.

In the merger area, a "Second Request" is a "phase two" investigation. It means you get a very close look, and it means you're going to be spending millions of dollars in producing documents and witnesses and databases. If you adjust for the number of merger filings, which is way down because of the economy, Second Requests are actually up 86% under Obama. That's huge. They're issuing twice as many Second Requests on a comparable number of mergers than the Bush administration.

One of the questions they're asking is, "Would these companies be 'too big to fail' if they merge?" I'm not sure what this has to do with antitrust, but they're asking those questions. They're also asking questions that relate to environmental law, so this isn't just about antitrust anymore.

OGFJ: Quite a few companies involved in mergers are international. In the oil service business, several of the largest companies say that 70%, 80%, or even more of their business is outside the US. Does this add to the complexity of closing a deal?

BOLAND: Let me give you an example. In the Schlumberger-Smith transaction, we made merger filings in about 20 countries. It does add to the complexity. You have to worry about one country that might hold up the entire transaction. You can usually prevent that by planning well on the front end of the deal. But sometimes what you end up doing is closing around that particular country, assuming you're allowed to do that. In other words, you merge the parent companies but you don't merge the two subsidiaries until they've finished their investigation. But there is always the risk that an agency in the US is going to do one thing and an agency in, say, Europe, will do something else.

OGFJ: A few months back, Chesapeake signed a JV agreement with the Chinese oil company CNOOC in the Eagle Ford Shale play in South Texas. Given the breadth and depth of your experience with deals of this type, do you think there will be political fallout over this simply because one of the JV participants is a Chinese company rather than, say, a British or French company?

BOLAND: In any deal involving a sovereign foreign country, there will be a review to look into any possible national security implications. There are always concerns that a foreign power may want to take over a company or purchase influence. However, I can't imagine that the Chesapeake deal, which is valued at less than $4 billion, won't go through. This amount is pretty much a drop in the bucket when it comes to natural resources. Since it is going through review, there will be political implications.

OGFJ: Are antitrust laws effective in fostering competition in the marketplace?

BOLAND: I think you've got to have them. I believe in antitrust enforcement. You can have a market where the concentration is too high and the entry barriers too great. In this situation, the few participants could use their market power to increase prices and diminish consumer welfare. The problem is that sometimes the government wants to increase antitrust enforcement regardless of whether they have the right deal in front of them or not. That's the problem. Even for transactions that get through, look at the millions of dollars in costs that are imposed on companies through these Second Requests and so forth. They delay the deal, tax it to death, and maybe even prevent it from being born. As a consequence, some companies are saying they don't want to go through this whole process, and that's unfortunate. So chilling economic activity is the biggest concern I have with the way antitrust laws are being applied today.

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