Hughes Ends Merger Talks With Baker International

Hughes Tool Co. terminated its proposed $1.2-billion merger with Baker International Corp. late Wednesday after failing to negotiate a last-minute plan to overcome Justice Department antitrust objections.

Baker immediately marched into a state court in Houston and filed a lawsuit against Hughes and certain of its directors, demanding that the ailing oil services company be forced “to live up to its deal,” said Baker President James D. Woods.

Hughes said it had hoped to find a way to appease the Justice Department’s concerns before consummating the merger. But, Hughes officials said, Baker executives balked at that approach and insisted that the government’s consent decree be signed immediately and that the merger proceed on schedule.

The merger would have combined Baker, the world’s third-largest oil services company, with the fifth-largest company in the field to create a concern with more than $3.2 billion in annual revenue. Analysts estimated that joining operations of the two ailing companies would have produced $65 million to $80 million in much needed cost savings. For the first nine months of their current fiscal years, Hughes lost $507 million and Baker lost $250 million.

The merger was first thrown into jeopardy last week when Hughes directors rejected as “unreasonable” Justice Department demands presented in a consent decree.

While the entire contents of the consent decree have not been made public, Baker and Hughes said that it would require Baker to sell all or part of its electrical submersible pump business, the domestic portion of which Baker already has tentatively agreed to sell to Trico Industries Inc.

More importantly, Baker would have 90 days in which to find a buyer for its larger domestic rock drill bit business and for a rock bit plant in Singapore. It would then also have to offer for sale the worldwide operations of its entire Reed Tool division, including diamond bits and mining bits.

Hughes has complained that the Justice Department would claim the right to reject any potential buyer or terms of sale for Baker’s businesses. The company also has balked at a condition that it says would require the combined Baker-Hughes company to provide a large line of credit to offset any operating losses in the divested operations and fund any capital expenses that Reed units would incur while they were up for sale.

Still, Baker’s directors agreed to sign the consent decree, contending that they feel confident they can find a qualified buyer for the minimum amount of assets the Justice Department is requiring it to sell. Baker shareholders also approved the merger.

Hughes officials wanted to pursue what they called a “fix-it-first” approach. Under that plan, a purchaser for Reed’s operations would have to be approved by the Department of Justice by April 22--the last date the merger could occur under the agreement in principal signed by the companies.

“For reasons Hughes does not fully understand, Baker declined to proceed in this fashion and insisted that it would proceed only if Hughes signed the consent decree,” Hughes said last night.

Speculation about the prospects for the merger, meanwhile, threw Wall Street investors into a tizzy as 1.2 shares of Hughes traded Wednesday--marking what analysts said is believed to be the highest daily volume of trading in the company’s history.

Isaac C. Kerridge, Jr., Hughes’ vice president of stockholder relations, said he was beseiged with calls from anxious arbitrageurs who had purchased Hughes stock in anticipation that it would gain value from the merger. With the merger appearing shaky Wednesday, Kerridge said, the arbitrageurs were starting to sell.

But at the close of trading Wednesday on the New York Stock Exchange, Hughes stock was selling at $11 a share, up nearly 38 cents from Tuesday. Baker’s stock closed at $15.38, per share, up nearly 63 cents.

Despite Hughes’ rejection of the merger, Baker officials said they would proceed with the divestitures requested by the Justice Department.

James L. Carroll, oil services analyst with Paine Webber in New York, predicted that rejecting the Baker merger will make Hughes vulnerable to a hostile takeover by Baker or some other company.