Justice Dept. to Oppose Merger of Hughes, Baker : Says Combination Would Hurt Competition in Oil Pump, Tricone Bit Markets

In one of the biggest antitrust actions of the Reagan Administration, the Department of Justice said Sunday it would seek to block the merger of two of the world’s largest providers of oil well drilling equipment, Baker International Corp. of Orange, Calif., and the Hughes Tool Co. of Houston, the firm founded by the father of billionaire recluse Howard Hughes.

Charles F. Rule, acting assistant attorney general in charge of the department’s antitrust division, said that the civil suit will charge that the proposed merger would substantially lessen competition in two markets, the market for tricone rock bits and the market for electric submersible pumps used in oil wells.

“We recognize that the oil industry is in the midst of a severe depression,” Rule said. “However, we are convinced that Hughes and Baker are two of the strongest competitors in the adversely affected markets and their independence is essential to ensuring that those markets remain competitive. This nation must maintain competitive prices in these markets, which play such an important role in the strategically crucial oil industry.”

Divestments Planned

Both firms, when notified of the intended antitrust action, said they would begin negotiations aimed at divesting some of their businesses “in order to remove competitive problems and allow settlement of the suit,” the department said.

At present, Rule said, there are only four major producers of tricone rock bits and four major producers of electronic submersible pumps. “If this merger is allowed to proceed, there will be only three significant competitors in each market,” he said. “Moreover, it will create a dominant firm with market power in the tricone drill bit market. We can expect purchasers of these products to be forced to pay higher prices that will increase the cost of producing oil.”

Tricone rock bits are drill bits, with steel teeth or tungsten carbide inserts, that are used to drill for oil. Electric submersible pumps are pumps driven by electric motors that are located at the bottom of an oil well and used to lift oil to the surface.

Rule said that the Justice Department took the unusual action of announcing the suit late Sunday afternoon because it “wanted the news out before the stock market opened” Monday and feared that an approaching snowstorm in the Washington area might delay Justice Department officials “so they couldn’t get in on time Monday to announce it.” Rule said the department “didn’t want anybody to have an unfair advantage.”

In 1985, the two firms had combined total sales of $3.2 billion, the department said. The approximate value of the common stock of Hughes is $450 million, and the estimated value of Baker common stock is $750 million, according to the department.

This was the fourth merger action announced by the department in the past six weeks, Rule said. “It’s a reflection of there being a large surge in merger filings last year for tax reasons,” he said. “It was advantageous under the old tax law to merge.”

In two of the cases, the companies abandoned their plans to merge, while a third is negotiating “to solve the problems it has with the Justice Department,” he said.

No. 1 and No.3

In 1986, sales of tricone rock bits in the United States totaled about $190 million, the department said. Hughes and Baker are the No. 1 and No. 3 firms in the tricone rock bit market, with market shares of about 30% and 17% respectively, according to the department.

Based on 1986 sales data, the post-merger Herfindahl-Hirschman Index, or HHI, a measure of market concentration, is approximately 3,300, boosted approximately 1,000 points by the merger. Under the department’s 1984 merger guidelines, proposed mergers would ordinarily be challenged--unless there are extenuating circumstances--if the post-merger concentration level of the market measured by the HHI is substantially larger than 1,800 and the proposed merger had raised the level by more than 100 points.

Currently, Hughes has outstanding judgments totaling hundreds of millions of dollars against the two other major firms in the tricone rock bit market, the department said. Smith International Inc., the second-leading firm in the market, is in bankruptcy proceedings and, as a result of the judgment, Hughes is its largest single creditor, the department said.

Sales of electric submersible pumps in the United States in 1986 were approximately $110 million, the department said. Hughes and Baker rank first and fourth in this market, with shares of about 35% and 11% respectively. The post-merger HHI, based on 1986 sales data, is approximately 3,400, with a change of approximately 700, according to the department.