Hughes Tool Goes Forward With Proposed $1.2-Billion Baker International Merger

After winning what it called important concessions from the Justice Department, Hughes Tool on Wednesday accepted the overwhelming vote of its shareholders and took steps to go forward with its proposed $1.2-billion merger with Baker International.

The moves followed weeklong negotiations with the Justice Department to hammer out a revised consent decree that requires the combined company to divest important drill bit and pump operations.

The Justice Department agreed to give Baker Hughes--as the new company is to be called--at least six months and as long as nine months to sell the two units.

The government originally had given Baker Hughes just three months to divest its bit operation, which regulators contended would have given Baker Hughes an unfairly large share of the domestic market. The submersible pump operation already has been sold.

The Justice Department also agreed late Tuesday night to set a $10-million cap on the working capital that Baker Hughes will be required to provide to the business units that it is selling. “It sets a limit on how much blood we have to give,” said Dexter Peacock, Hughes outside counsel, in an interview.

Regulators Flexible

Although Hughes officials last week said that meeting the Justice Department’s requirements were making the merger unworkable, antitrust regulators said Wednesday that they always viewed the terms of the consent decree as open to modification.

“Our main aim has always been to ensure that there would be a divestiture of a viable entity within six months,” said Roger Andewelt, deputy U.S. attorney general in charge of litigation. “The terms of how we would meet our requirements were subject to negotiation.”

In fact, when Hughes said it was calling off the merger talks last week, regulators were taken aback, Andewelt said. “We always viewed them as fluid negotiations,” he said. “Frankly, we were surprised that the talks broke down.”

Hughes and Baker officials estimated that the merger will be completed in two to three weeks, or just as soon as the Justice Department’s modified consent decree is put in final form and filed.

After announcing the agreement, Hughes held its oft-delayed meeting of stockholders and reported that 75% of the company’s shares had been voted in favor of the merger.

Savings From Benefits

Officials of both companies said that despite the divestitures required by the Justice Department, the benefits from consolidation of the remaining facilities and staffs will save them between $45 million and $65 million a year.

Hughes Chairman William A. Kistler Jr. told shareholders, “We think that in the third full quarter after the merger we should see something close to a break-even.” In the latest fiscal nine months, Hughes lost $507 million and Baker lost $250 million.

A week ago, Hughes threatened to back out of the long-anticipated merger when Baker rejected its proposal that was designed to avoid conditions in the Justice Department consent decree that Hughes considered too onerous.

But by Thursday morning, after Baker hit Hughes with a $1-billion lawsuit for breach of contract, the Hughes directors decided to reopen negotiations.

Analysts generally agreed Wednesday that the biggest benefit of the Justice Department’s decision is that it allows Baker Hughes time to get a better price for the assets it must sell. And, most analysts agreed that the company will have little trouble finding a buyer for Baker’s Reed Tool subsidiary.

Moreover, the analysts say, the Justice Department’s decision provided Hughes with a face-saving way to agree to the merger, which was nearly torpedoed last week.

“It gives a way for Hughes to sort of look like it won something for the shareholders,” said Sam Albright, oil services analyst for the New York investment firm of Kidder Peabody & Co. “There was a lot of pressure on those guys between the lawsuit and the shareholders.”

“I think Hughes’ management and inside directors all along were very cool to the merger and they probably still are,” said James Carroll, an analyst with New York-based PaineWebber Inc. “I think it took Baker’s lawsuit to get the outside directors’ attention and get the merger back on track.”

Although Baker Hughes is required to provide some financial support to the divested operations, the financial burden should be minimal, said James Crandell, oil services analyst for Salomon Brothers Inc.

“I think it’s going to have zero impact,” Crandell said. “Reed Tool is having positive cash flow, and I think the business is improving, so Reed’s cash flow should get even better.”

After the announcement, Hughes shares gained $1 in active trading on the New York Stock Exchange to close Wednesday at $13 a share. Baker stock, by contrast, fell 62.5 cents in Big Board trading to close at $16.125 a share.