The merger between Halliburton (HAL) and Baker Hughes (BHI) has been the talk of the financial markets for nearly 18 months. Hedge fund managers and arbitragers have had a lot riding on the deal and Halliburton had vowed to do whatever it takes to garner regulatory approval According to sources, both companies are expected to announce the merger's termination on Monday:

Halliburton Co and Baker Hughes Inc are expected to announce the termination of their merger agreement on Monday after it faced opposition from U.S. and European antitrust regulators, a person familiar with the matter said.

The deal would have brought together the world's No. 2 and No. 3 oil services companies, raising concerns it could result in higher prices in the sector. It is the latest example of a mega merger failing to make it to the finish line because of antitrust hurdles.

The merger between the number two and three oilfield services giants has been heavily-scrutinized by the DOJ and regulators in Europe, Australia and Brazil; they have voiced concerns that the merger could lead to higher prices in the oilfield services space or reduced competition post-deal. The death knell occurred last month when the DOJ sued to block the deal, alleging that the merger threatened to eliminate competition.

Potential Impact On Baker Hughes

BHI has been divorced from earnings fundamentals and traded based on its implied merger value. At $48.36 it is now 26% below its implied merger value of $65. It is due a $3.5 billion merger break-up fee. The after-tax value of the fee (about $2.5 billion) would be a boon to the stock. BHI could spike on Monday due to its new windfall. However, the fee would be a one-off event and should not received an earnings multiple. Nonetheless, it would enhance Baker Hughes' liquidity; cash would increase from $2.2 billion at Q1 to $4.7 billion and help Baker Hughes stave off the downturn in the oil and gas industry.

Including the break-up fee I value BHI at $20, or 7x run-rate EBITDA. Q1 revenue was off 21% sequentially, while revenue from North American was off 28%. Baker Hughes receives over 30% of its revenue from North America. The U.S. rig count is near historic lows and until it rises, North America will likely provide headwinds for Baker Hughes. After Q2 earnings are released I believe BHI will begin to trade closer to its intrinsic value.

Potential Impact On Halliburton

The failed merger will not be good for Halliburton. The after-tax break-up fee would be about $2.6 billion. The company had $10 billion in cash at the end of the year. The break-up fee, along with $2.1 billion in restructuring charges and $700 million credit exposure to Venezuela will hurt Halliburton's liquidity. In my opinion, liquidity will be as important as earnings while the oil & gas industry downturn continues. Regardless of how much capital Halliburton has, $3 - $4 billion in cash going out the door cannot sit well with shareholders or regulators.

Including the impact of the break-up fee I value HAL at $20 or 51% below its current value of $41.31. It too is reeling from the diminution in North America; it warned that Q1 revenue would experience a sequential decline of 17%. It has 40% exposure to North America, which will likely bear the brunt of the revenue declines. Waning liquidity, and declining revenue and cash flow will likely be hard for bulls to swallow. Furthermore, with the $2 billion in merger synergies now a pipe dream, there are no near-term catalysts in sight. I expect HAL to fall hard this week and trade closer to its intrinsic value prior to Q2 earnings.