After days of speculation and the recent hostile bid, oilfield service behemoth Halliburton Co. (HAL – Analyst Report) and its smaller rival Baker Hughes Inc. (BHI – Analyst Report) confirmed that they have entered into a merger agreement.  

Despite pitching favorable outcomes of the merger, Halliburton shareholders did not take the deal kindly and the stock plunged over 10%. The company, offering a substantial premium and agreeing to pay hefty breakup fees (details given below), has a hand in this downfall. On the other hand, the Baker Hughes stock gained nearly 9%.

Agreement Details

The stock and cash agreement has an equity value of $34.6 billion. Halliburton has offered $78.62 for every Baker Hughes’ share, a substantial premium considering that the latter closed at $65.23 on Nov 17.

Shareholders of the Zacks Rank #4 (Sell) Baker Hughes will receive 1.12 Halliburton shares and $19.00 in cash for each share they hold. Halliburton stated that it plans to fund the cash portion of the deal with available cash in hand and debt financing.

Following the closure of the deal – expected in the latter half of 2015 – Baker Hughes’ shareholders will own about 36% of the combined entity. The new board, comprising 15 members, will house 3 members from Baker Hughes’ board.

The combined company will continue trading on the NYSE under the name ‘Halliburton’ and ticker ‘HAL.’

What’s in Store for Halliburton?

Apart from the elimination of a major competitor, a combination with Baker Hughes would provide the world’s second-biggest provider of oilfield services the much-needed boost in taking on the largest player in the field, Schlumberger Ltd. (SLB – Analyst Report).

The merger would increase the breadth and depth of the product portfolio of the combined entity, thus increasing leverage. Moreover, Halliburton expects the combined company to achieve cost synergies of about $2 billion per year. This should aid financials considering that major upstream players are cutting capital spending in this depressed pricing market.