The Department of Justice has filed a civil antitrust lawsuit seeking to block Halliburton Company’s proposed acquisition of Baker Hughes.

The Department alleges that the transaction threatens to eliminate competition, raise prices and reduce innovation in the oilfield services industry.

The department filed its lawsuit in the U.S. District Court for the District of Delaware, where both companies are incorporated.

The complaint alleges that the acquisition – which the companies valued at $34 billion when announcing it – would combine two of the three largest oilfield services companies in the United States and the world, eliminating important head-to-head competition in markets for 23 products or services used for on- and off-shore oil exploration and production in the United States.

“I have seen a lot of problematic mergers in my time, but I have never seen one that poses so many antitrust problems in so many markets,” said Antitrust Division chief Bill Baer. “The merger turns the big three (Baker Hughes, Halliburton, Schlumberger) into the big two, here and around the world.”

“Halliburton is the largest oilfield services company in the United States and proposes to acquire its fierce rival, Baker Hughes,” Baer said. “ Along with Schlumberger, these companies are the ‘Big Three’ in this business because they are by a wide margin the three largest globally integrated oilfield services companies.”

“Indeed, over 90 percent of Halliburton’s revenues derive from products and services that are also sold by Baker Hughes. The same is true for Baker Hughes’ revenues. Over 90 percent of its revenues come from markets where it competes with Halliburton.”

“It is not surprising, therefore, that our investigation revealed serious antitrust problems in numerous markets representing billions of dollars of revenue. We found 23 product and service markets where the merger would cause a substantial lessening of competition. The antitrust problems here encompass most of the major steps needed to explore formations, to drill oil and gas wells, and to complete those wells. These products and services include directional drilling, drill bits, fluids, cementing, sensors, safety valves and other ‘tools’ that are essential to energy exploration and production.”

“In many of these markets, the merger would leave the industry with just two dominant suppliers – a virtual duopoly.  Look at the market share chart attached to our press release.  In eight of the markets alleged in the complaint, the post-merger Halliburton and Schlumberger would have over 90 percent of U.S. sales.  In nine other markets, two firms would have a combined share above 70 percent.  And in two of the markets – offshore stimulation vessels and offshore liner hanger systems – the merged Halliburton alone would have a share above 80 percent.  I have seen a lot of problematic mergers in my time.  But I have never seen one that poses so many antitrust problems in so many markets.”

“But the problems with this proposed merger are even greater than these share numbers indicate. Halliburton and Baker Hughes, along with Schlumberger, drive innovation in these markets, often leading the way in developing next-generation technology to solve the most challenging problems facing the oil and gas industry. Take Baker Hughes, for example. Our complaint notes that it has hundreds of active research projects and launched 160 new products in 2014 alone, which generated over $1 billion in revenue. The Big Three are unique in so many respects.  They often are the only suppliers qualified to bid on the most challenging projects involving offshore wells or deep onshore wells where products must function in high temperatures and at high pressures.”

During the department’s investigation, Halliburton proposed to remedy the significant harmful effects of the transaction by divesting a mix of assets extracted from certain business lines of the two companies.

The Justice Department said the proposed divestitures would not include full business units but rather would be limited to certain assets, with the merged firm holding onto important facilities, employees, contracts, intellectual property, and research and development resources that would put the buyer of those assets at a competitive disadvantage.  The proposed divestitures mostly would allow Halliburton to retain the more valuable assets from either company while selling less significant assets to a third party.

The complaint further alleges that this divestiture would not replicate the substantial competition between the two rivals that exists today.

Baer said that “settlement talks were never under way.”

“We had an obligation to listen to merging parties about proposed divestitures,” Baer said. “We have made the decision that there is no fix to this transaction.”

Baer was asked whether the lawsuit to stop the Baker Hughes Halliburton merger was sending a signal that the Department was getting tougher on these types of mega-mergers.

“We are seeing much more merger activity,” Baer said. “There is more out there and more for us to look at. There may be in the enthusiasm once all that capital started coming back in the marketplace, let’s give it a go and we’ll come up with some cheap fix. We are trying to message quite clearly that  — if there are competitive problems, we are going to go after them. There are some deals that are so antitrust risky that they never ought to make it out of the executive suite.”

“We told the parties after a period of investigation that we were highly skeptical,” Baer said. “They exercised their right to try and persuade us otherwise. But their CEOs saw there was enormous antitrust risk. They have gone down this path with their eyes wide open. We reached the point where we couldn’t figure out what the remedy was they were proposing. We have a process. We took the time and now we are ready to act.”

Halliburton is a Delaware corporation headquartered in Houston.

Founded in 1919, Halliburton is the largest provider of services and products to the oil and gas industry in the United States.

It has operations in approximately 80 countries and earned revenue of $23.6 billion in 2015.

Baker Hughes is a Delaware corporation headquartered in Houston.  It was formed in 1987 with the merger of Baker International and Hughes Tool Company, both founded over 100 years ago.

The third-largest provider of oilfield services in the world, Baker Hughes operates in more than 80 countries and earned revenue of $15.7 billion in 2015.