The Taking of Getty Oil

by Coll, Steve;

  Petersen was in his office at Getty Oil headquarters in Los Angeles; Lasky, Gordon, and Tim Cohler were on the speakerphone together in Lasky’s office in San Francisco.

  “There was a visit from Corbin J. Robertson and a Manufacturers Hanover banker representing the Cullen family interests,” Petersen was told. “They proposed a buy-out of the public shareholders—i.e., they want to take the company private. The scheme would then be to sell off some of the company’s assets, including refineries and so on, to pay back the money borrowed.”

  Petersen was stunned. He had feared the worst when Gordon told him about his trip to Wall Street in September. Now, perhaps, the worst was about to occur.

  Gordon, however, tried to reassure the Getty Oil chairman. “I’m not very sympathetic to it,” he repeated several times, referring to Robertson’s proposal.

  “Instead,” Gordon went on, “I’ve hired the Lasky firm to help me consider the establishment of a royalty trust at Getty Oil. I have a new wrinkle. I’d like to meet with you next Tuesday, if we can, to begin the study, and I’d like to bring along Tim Cohler and Tom Woodhouse.”

  Petersen was relieved that Gordon was “not very sympathetic” to the Cullens’ takeover plan, but there was no way to be sure how Gordon had left things with Robertson. Perhaps Gordon had merely decided to think about Robertson’s ideas while he studied a royalty trust, the restructuring device first raised by Gordon at the Phoenix airport in September. Petersen said that Getty Oil would certainly cooperate with any internal studies that Gordon wished to undertake. He also expressed his concern that any detailed royalty trust study would require access to some of the company’s most sophisticated and confidential financial information. It was important, Petersen indicated, that the study be kept secret from Getty Oil managers; the chairman did not want wild rumors about Gordon Getty’s intention to possibly restructure the company spreading through headquarters. Petersen told the Lasky lawyers that only a handful of Getty Oil’s top executives would be involved—mainly Steadman Garber, a former investment banker now in charge of planning, and Duane Bland, the chief financial officer. Gordon would have to keep his lips sealed.

  Also, Petersen said, the company would have to suspend its stock buy-back program, the one Gordon had urged Petersen to pursue at the Texas board meeting in July. The company could not legally purchase its own shares in the market while contemplating a major royalty trust restructuring that would affect the price of company stock—such purchases would surely invite a shareholder lawsuit against management alleging insider trading. Gordon’s lawyers agreed to Petersen’s conditions. As a legal matter, there was no question that the buy-back should be suspended, and as for the chairman’s concerns about confidentiality, well, Gordon’s lawyers said they would defer to Petersen’s judgment about who should be informed. What Gordon wanted was a detailed royalty trust study. He did not much care how it was produced.

  Privately, Petersen felt ambivalent about the idea of a royalty trust. As an intellectual issue, as a business structure to be explored and evaluated, he was all for it, he said later. But a royalty trust was also a tactical device—it was Boone Pickens’ weapon of choice in the bloody oil industry takeover wars, where careers and whole companies were at stake. In that context, Petersen was hardly inclined to embrace the idea. Simplified, a royalty trust was a restructuring program that would transfer ownership of specific oil properties from the corporation, Getty Oil, directly to shareholders such as Gordon Getty’s family trust. The rich Kern River field in California, for example, might be an attractive candidate for conversion into a royalty trust. That way, Getty Oil stockholders would own the field directly through the trust, and the profits from its production would flow directly to them, rather than through the corporation.

  Advocates of royalty trusts argued that there were both tax and economic benefits to this arrangement. For one thing, a trust eliminated the so-called double taxation of dividends. Ordinarily, the profits from the Kern field flowed first to Getty Oil, where they were taxed as corporate profits. Then, after those taxes were paid, some of the remaining money was distributed to shareholders in the form of quarterly stock dividends, where the money was taxed again as personal income. With a trust in place, the Kern River profits would be taxed only once each year when they were distributed directly to shareholders of the Kern royalty trust. By the same logic, the overall stock price of Getty Oil should rise if a royalty trust was established. Because large oil companies such as Getty were so vastly undervalued by the stock market, it was calculated that the combined price of a royalty trust and the shares of surviving Getty Oil would be significantly higher than the company’s current stock price (the trust was a structural, paper-shuffling change; employees would be technically reassigned to the trust but not fired).

  It was this possibility—that the creation of a royalty trust at Getty Oil might quickly and dramatically raise the price of the company’s stock—that attracted Gordon Getty. The principles involved were similar to those underlying Corby Robertson’s “partnership” takeover proposal, except there would be no change in ownership or control if Petersen went along with the royalty trust. Since the Sarah Getty Trust controlled by Gordon owned some thirty-two million shares of Getty Oil stock, even a small price rise could have a profound effect on the value of the Getty family’s holdings. If Gordon could close the value gap completely by raising Getty Oil’s stock price above $100 a share, then he would virtually double his family’s wealth in just a short time.

  As he had promised Gordon in Phoenix, Sid Petersen had indeed sent him a copy of an earlier study of royalty trusts prepared by Getty Oil’s corporate planning department. Gordon, however, was disappointed by the memo he received. It had been prepared by Steadman Garber, and it did not express nearly the enthusiasm Gordon did about royalty trusts. “I have completed a review of royalty trusts and I believe that neither of the previously used methods of distribution are appropriate for Getty,” Garber had declared in the first sentence of his August 18, 1982, report.

  The memo, which was only a few pages long, went on to list the drawbacks of a trust. It might be difficult to finance; it might raise the company’s debt level; its full tax consequences were difficult to determine; and, of course, there was the problem that implementing a royalty trust would be like admitting that Getty Oil was in a state of liquidation, that it was having a last white sale for shareholders. “While liquidation may be seen as a way to increase the shareholder’s wealth near term, it is management’s objective to ensure that the organizational value as a going concern is greater than its liquidation value,” Garber wrote. Management’s objective—yes. But it was an objective unmet. It had been years now, and still Getty Oil was worth more dead than alive. After his meeting with Robertson on October 14, Gordon had discussed the Garber memo with Tim Cohler and Tom Woodhouse at the Lasky firm. He did not feel that Petersen had explored the issue thoroughly enough; even Garber’s own report indicated that there was more that could be done. It was Gordon’s desire for more studies that led to the October 21 phone call with Petersen, where the meeting with Robertson was finally disclosed and a new demand was made for an in-depth company study of royalty trusts.

  After that telephone conference, and all through the fall of 1982, Cohler and Woodhouse traveled between San Francisco and Los Angeles, ferrying questions and documents and computer analyses between their client, ensconced in his mansion on Broadway, and the company, represented now mainly by Garber and Bland. Relations between them were basically cordial. Like Petersen, Garber and Bland were curious about the ideas so forcefully propounded by Boone Pickens, and they were willing to examine the ideas in detail. They tended to doubt that a royalty trust would withstand close scrutiny, but they were willing to keep an open mind. In his August memo, Garber had rejected the essential Pickens premise that companies such as Getty Oil should accept the fact they were in a state of liquidation. Even so, it was possible that some form of royalty trust would raise
the price of Getty Oil stock, and that was an objective all the company’s top executives shared, not least because they feared a takeover raid by Gordon or the Cullens. So, maintaining tight secrecy about the nature of their work, Garber and Bland dug through the company’s files and operating reports to assemble the detailed financial information necessary for their studies.

  It seemed to them, however, that whenever they presented their findings to Gordon, it was like they slipped backward on a treadmill. Gordon seemed to ignore their conclusions and drift off on tangents. After a few weeks, for example, the finance executives discovered that the tax consequences of a royalty trust for Gordon might well be disastrous—it was a problem unforeseen by Boone Pickens because Gordon’s situation was so unusual. When the royalty trust was established, each Getty Oil shareholder would have to pay a one-time tax on those Getty shares converted into the trust. The amount of that tax depended on how much the shareholder had paid for his stock in the first place—his so-called “basis.” In Gordon’s case, the stock held by the Sarah Getty Trust had been acquired decades before by his father and his grandfather. The trust’s basis was close to zero. That meant if a royalty trust was established, the Sarah Getty Trust’s one-time tax bill would be enormous, perhaps as much as a billion dollars or more. For Garber and Bland, that was enough to kill the idea altogether. But Gordon seemed not to accept this conclusion and instead tinkered with the numbers and asked additional questions. So back they went to the files, digging for more information to satisfy Gordon. After a time, Gordon abandoned his interest in royalty trusts, and he told the Getty Oil finance men that he was now interested in studying limited partnerships, the structure proposed to him by Corby Robertson.

  A partnership was conceptually the same as a royalty trust, but it had different tax consequences. Garber and Bland’s frustration began to build—after weeks of hard work, they had managed only to start all over again. Petersen, too, grew increasingly frustrated by Gordon’s questions and demands. By late fall, the Getty Oil chairman wanted these studies behind him. He wanted to return to the stock buy-back plan that had been authorized by the board earlier in the year, but which was now suspended pending the outcome of Gordon’s studies. Petersen had not told any of the board members about the studies or the buy-back suspension, and he was worried that soon he would be forced to make an explanation as to why the company had stopped buying its own shares in the market.

  “I never thought it was going to be like this,” Petersen muttered to his top executives as the fall wore on and still Gordon’s questions about trusts and partnerships persisted.

  There was some consolation, at least. The studies might be frustrating and distracting, Petersen thought, but they seemed to have turned Gordon away from the takeover proposal made by the Cullens in October. Petersen assumed that Gordon had stopped talking to Corby Robertson. Surely, Gordon understood that it would not be appropriate to talk with Robertson about Getty Oil now that Gordon had regular access, through his studies, to the company’s most closely guarded financial information.

  In fact, Gordon had kept up regular contacts with the Cullens, and he even disclosed to Robertson some of the sensitive data passed along to him by Garber and Bland. In kind, Robertson tried his best to stimulate Gordon’s interest in a takeover. On October 21, October 29, November 11, November 22, November 30, December 2, and December 7, Robertson wrote letters to Gordon at his Broadway mansion, sometimes enclosing analyses or newspaper articles he thought might be of interest. If Gordon was indeed “not very sympathetic” to the Cullens’ proposal, Robertson himself seemed not to get the message. He continued to press Gordon about a deal, and Gordon continued to correspond and to receive his calls. Anything was possible, Gordon said later. And he meant it—Gordon Getty was a man nearly bursting with enthusiasm for change. Precisely what sort of change, he could not say. Precisely where that change would lead, he was not sure. But he was certain about one thing: when he finished, things would not be the same at Getty Oil Company.

  About that much, Gordon Getty was absolutely right.

  5

  At the Bonaventure

  Friday, December 24, 1982, the day before Christmas, was cool and blustery in San Francisco, but the Getty mansion on Broadway was warm and bright with holiday cheer. There were no less than fourteen Christmas trees in the sprawling house, each one distinctively decorated and illuminated. Among them was the family’s traditional “teddy bear tree,” hung with a variety of specially dressed toy bears. Amid such splendor and radiance, a sentimental man such as Gordon Getty might feel a certain glow of satisfaction about the world he inhabited.

  Certainly, that was the tone of the letter Gordon wrote that day to Sid Petersen in Los Angeles. The day before, Thursday, Petersen had been in San Francisco for a meeting with Gordon at the Lasky, Haas offices, situated on the twelfth floor of a steel-and-glass office building near the Transamerica tower in the downtown financial district. The purpose of the meeting had been to present to Gordon the latest studies about limited partnerships and royalty trusts conducted by Steadman Garber and Duane Bland. The Getty Oil contingent had hoped that this presentation would mark the end of Gordon’s inquiries. Bland, Garber, and Petersen had concluded weeks before that there were too many tax and financing problems associated with trusts and partnerships, and that the best course would be to end all the studies and return to the stock buy-back program originally established by the board of directors. Petersen had been sorely disappointed at the meeting on Thursday at Lasky, Haas. Not only had Gordon refused to end the studies, he declared that there was much work still to be done on the question of limited partnerships. There had been a nearly audible sigh in the Lasky conference room when Gordon made his pronouncements. Petersen had seemed tense and defensive to some of those at the meeting, but he had ended the day on a cordial note with Gordon, trying his best to show the deference and respect that was so important to the Getty scion.

  “The meeting yesterday was really helpful,” Gordon wrote to Petersen from his mansion on Christmas Eve. “I am convinced that you and I both have the same objectives—the best interest of all the stockholders—and that we both have open minds. We all want to resolve the uncertainties as quickly as we can.… It will save time if Getty Oil Company’s people and the trust’s remain in close contact, since each discovery may suggest a shift of emphasis. What we want first is ‘enough’ detail sufficient to warrant either disclosure of the studies to shareholders or suspension of the studies. We don’t know yet how much is enough. At some point, we’ll decide we’re there.… The idea we were studying before the current one, by the way, shouldn’t be pronounced dead. If the current one fails, the other one might be revived. But we can give it a low priority for now. Thanks again for the time and trouble taken away from your holidays. Merry Christmas to you and Nancy. Best Regards, Gordon P. Getty.”

  The contrast between Gordon Getty’s happy, easy, open-ended attitude and Sid Petersen’s tense, tight-lipped concern was growing wider as the days passed, and perhaps nothing captured the contrast better than Gordon’s letter. Here was Gordon, the day after a meeting at which he had aggravated Petersen to no end, writing as if the Getty Oil chairman was his firm ally. In part, this gulf of misunderstanding was a result of Petersen’s distant demeanor around Gordon, his unwillingness to raise his voice, his attempts to show Gordon the respect urged by Moses Lasky the previous May. Also, however, it was a reflection of Gordon’s own naïveté, his inability to sense that Petersen’s deference was insincere and that the Getty Oil chairman was harboring deep anger and anxiety behind his respectful veneer. Later, Gordon and his advisors would call Sid Petersen “two-faced,” and it was in some ways a just accusation, since Petersen felt deeply angry and concerned about Gordon Getty and yet showed him little of his brewing emotion. Petersen festered, as Gordon himself put it. But after all, Lasky had told Getty Oil general counsel Dave Copley in May that if the company directors thought poorly of Gordon and his ideas, Lask
y hoped they would not show their feelings and by doing so provoke the Getty scion to rash action. Petersen, then, was merely following Lasky’s advice.

  By that December, however, Gordon Getty seemed to be acting rashly despite the executives’ careful approaches. The contact with Corby Robertson was beyond the pale, Petersen thought. It was not just that Gordon was conspiring with an outsider who was poised to make a hostile bid for control of Getty Oil. It was that Gordon was using, in all likelihood, the highly confidential company information being developed for the Garber and Bland studies to act against the company itself. Nearly every week, detailed, sophisticated, highly secret analyses of Getty Oil’s reserves, operations, and finances were being shipped by Garber and Bland up to Gordon in San Francisco. Was he then turning these studies over to Robertson and other outsiders? Petersen had no way to know for certain, but he suspected that Gordon was sharing information in the studies. If so, Gordon was likely violating the law; at the very least, he was moving into a precarious legal gray area. Gordon was a director of Getty Oil. In that position, he had certain legal obligations to protect the company’s shareholders. Turning over secret company documents to a competitive, aggressive corporate raider was hardly consistent with those obligations.

  What Gordon Getty did not realize when he wrote his hopeful, friendly letter to Sid Petersen on December 24 was that only a few days before, concerned about Gordon’s behavior, Petersen had met with his lawyers at Getty Oil headquarters to discuss how they might launch a legal challenge to Gordon’s control of the Sarah Getty Trust. At that meeting, Petersen was not yet convinced that an all-out war between Getty Oil and the company’s largest stockholder was necessary or desirable. But he was willing to consider the possibilities. Apart from what he described as Gordon’s outrageous conduct—the trip to Wall Street, the meeting with Robertson, his probable misuse of confidential company information—Petersen was driven by his own instincts and frustrations. It wasn’t meant to be this way, he thought. There was a reason that J. Paul Getty had not named Gordon sole trustee of the Sarah Getty Trust in the first place. The old man knew his son. That’s why he wanted Lansing and Security Pacific Bank as cotrustees, so that Gordon would never be alone in charge. How right the old man was, Petersen believed. At the meeting in his office that December afternoon, the Getty Oil chairman had asked his lawyers if there was anything they could do to thwart Gordon Getty’s unchecked power over the family trust.