The Taking of Getty Oil

by Coll, Steve;

  It was an interesting choice for several reasons, but most importantly, it was a strategic victory for Sid Petersen. Headquartered on Broad Street, across from the New York Stock Exchange in lower Manhattan, Goldman, Sachs was one of the largest and most prestigious firms in the ascendant realm of Wall Street investment banking. It was a firm of many contradictions. For decades, it had been considered one of the Street’s most aggressive trading houses—that is, a firm that specialized in stock, bond, and commodity trading for its own account and for clients. It was a traditionally Jewish firm, an unapologetic contrast to the staid, cautious WASP establishment represented by houses such as Smith Barney and Morgan Stanley. Since the 1950s, Goldman, Sachs had been dominated by two of the Street’s canniest, fiercest traders, Gus Levy and Sidney J. Weinberg. Levy, especially, had been a major force in American finance, serving as director of numerous large corporations and raising millions for Republican politicians and Jewish philanthropies. He was indefatigable, intense, and deeply attracted to the power of money. He loved nothing better than to trade for profit; his particular specialty was arbitrage, an arcane, fast-paced field wherein success depends on guts, speed, and stamina. Weinberg, too, was a natural trader, and though less well known than his partner Levy, he was an equal force on Wall Street, where he churned out huge profits for his firm.

  Both these titans died suddenly, Weinberg in 1969, and Levy of a stroke in 1976. By then, Goldman, Sachs had begun to grow and change. The takeover boom was under way, and hundreds of large corporations were under siege. Investment houses were expanding rapidly in size and scope, and nearly all wanted a place in the highly lucrative mergers game, where fees were based not on an hourly charge for advisory service, but on a percentage of the deal—in some takeovers, investment bankers could make millions in just a few days. For a firm like Goldman, there was a clear choice: should it help those companies on offense, the hostile raiders, or those on defense, the targets?

  After Levy’s death, control of the firm had passed to John L. Weinberg, Sidney Weinberg’s son, and John C. Whitehead, who had been the younger Weinberg’s friend and partner at Goldman for twenty-five years. These two had the attitude of second-generation bankers—more cautious, more part of the establishment, less ruthless and aggressive. They decided that in the mergers field, the firm’s future lay in defense, in protecting the managers of large corporations, men such as Sid Petersen, from unwanted attacks by outsiders. Alone among prominent investment bankers on Wall Street, Goldman, Sachs established a formal policy that as a matter of principle it would never work for anyone engaged in a hostile takeover bid. It was a profitable pronouncement since it attracted to the firm all those companies worried about a potential hostile bid but afraid that consultations with a banker would only aggravate their predicament by planting takeover ideas in the bankers’ heads.

  There were some on Wall Street who regarded Goldman, Sachs’ policy as a hypocritical ruse, a marketing trick, because Goldman instigated hostile deals directly and indirectly despite its policy, and because nearly every other investment house provided defenses against raiders without making a moral issue out of it. But it was precisely Goldman’s moral tone, the fact that defending corporations was not just a business but a matter of principle, that attracted executives like Petersen to the firm in times of crisis. As a result, Goldman was earning many tens of millions annually from the hostile takeover boom while at the same time declaring publicly that it opposed the phenomenon. In parallel, it had secured its reputation as an establishment firm dedicated to the interests of its huge, blue-chip corporate clients.

  That February, 1983, Tom Woodhouse, representing Gordon and the trust, Steadman Garber and Bart Winokur, representing Getty Oil, visited the Goldman, Sachs headquarters on Broad Street to discuss the firm’s engagement with Weinberg, Whitehead, and other partners. For Goldman, landing a client the size of Getty Oil was a happy occasion, especially since the company was the subject of swirling takeover rumors on Wall Street. Later there would be some dispute about exactly what was communicated when Woodhouse and Garber met with the Goldman, Sachs partners, but at the time everyone seemed to understand why the firm was being hired. Though it was being officially engaged by Getty Oil, Goldman was to undertake an objective study, supported jointly by the company and the trust, into royalty trusts, limited partnerships, stock buy-back programs, and any other gimmicks or devices that might raise the depressed price of Getty Oil stock. When the study was completed, Goldman would present its findings to Gordon, Petersen, and the Getty Oil board of directors. Goldman was to have no preconceived ideas about any of the issues it would address, Woodhouse said, and it was not to favor either the company or the trust in its analysis—it was to help decide what would be best for all stockholders. For reasons no one quite understood, Gordon was adamant that Goldman not pay any special attention to the trust’s position in a restructuring. This vague, even illogical admonition seemed to be another of Gordon’s private ethical imperatives.

  To assist Goldman’s effort, the Getty Oil finance executives in Los Angeles who had worked on these same issues for Gordon earlier sent boxes of their detailed financial data and tables back to New York. To the Getty Oil finance men, this was an absurd exercise. The only potential positive result, they thought, was that Goldman, Sachs, by virtue of its unassailable reputation, would convince Gordon of what the finance men had failed to persuade him, namely, that Gordon’s ideas about the oil business were worthless. Let Goldman try to explain it to him, they thought.

  But there was a certain defensiveness in the financial executives’ attitude toward the Goldman, Sachs study. After all, the corporate analysts at Goldman were regarded as the best in the business. They were young, brilliant Ivy Leaguers, financial blue bloods, confident to the point of arrogance. The Goldman analysts were especially proud of their credentials, their degrees and titles, it seemed to the Getty Oil executives. The Getty Oil men were older than the investment bankers and felt they had done much to earn their high positions at the company—hard work had gotten them ahead, not impressive sheepskins. So the finance men took a certain pleasure, during those first weeks after Goldman, Sachs was hired, as they watched the young, smug analysts struggle desperately to understand what Gordon Getty wanted. The Goldman bankers would call the Getty Oil finance men and say, in effect, “Well, you’ve got the numbers together here. But you don’t seem to know what Gordon’s objectives are. That’s the most important thing in a situation like this. You must know what the client’s objectives are.” The Getty Oil finance men rankled at this sort of lecture—“objectives” was a buzz word at the Ivy League business schools, they knew—and they tried to explain that it wasn’t that they were stupid, it was just that Gordon didn’t know what his objectives were, or if he knew, he wasn’t saying. When the young Goldman, Sachs analysts would pass this frustration on to their superiors at their firm, they would hear the same lecture from Weinberg or Whitehead: “Well, you’ve got to figure out what Gordon’s objectives are. Then you can do the study.”

  It was Whitehead, finally, who decided that he would personally determine what it was that Gordon Getty wanted. As part of Goldman’s engagement, it had been stipulated that one of the firm’s two cochairmen would fly to San Francisco to meet personally with Gordon and to pay homage to him. The task fell to Whitehead, and with Sid Petersen he arranged a day in February when the two could talk with Gordon at his Broadway mansion. Whitehead began the meeting by telling Gordon what he thought the scope of the assignment was. He tried to press Gordon about his objectives. “What, exactly, do you want to accomplish in a restructuring, if in fact a restructuring is one of your objectives?”

  Gordon did not really answer. Instead, he talked a great deal about the tax consequences of limited partnerships. Whitehead was not following Gordon, and he tried to shift the discussion to a more philosophical level. He wanted a broader sense of Gordon’s plans. “Do you want cash—income from the trust—or do you want long-t
erm growth?” Whitehead asked.

  “Yes,” Gordon answered, curling his lips into an inscrutable smile.

  Then Gordon began to talk. In his characteristic fashion, he rambled on to the Goldman, Sachs cochairman about fiduciary duties and value gaps and debt ratios and mutual funds—sometimes coherently and cogently, but more often stringing wild non sequiturs behind him. At one point, Gordon and Petersen took up their longstanding debate about diversification.

  “I really don’t think diversification makes much sense. A company should stick to what it knows, and stockholders can diversify by choosing the companies they own,” Gordon said.

  “Well, timing is the important factor to consider,” Petersen countered. “We did diversification during one period and now we are in fact doing other things and not diversifying because other investments look more attractive now. But the present situation may change, and diversification may look attractive again in the future. Business is not static. It’s dynamic and you make decisions within that. You can’t just liquidate the company, Gordon.”

  “Yes, I can,” he answered.

  After two hours or so, Petersen, Whitehead, and Gordon moved to the dining room for lunch. They continued their discussion, but Gordon’s tone began to shift. Whereas before he had said things like “We ought to be looking at” or “The company is considering,” he now began to use the personal pronoun: “I will do this” and “I might do that.” Petersen and Whitehead both became increasingly uncomfortable.

  When the meeting concluded, Petersen and Whitehead agreed to share a limousine ride to San Francisco International Airport, some twenty minutes from Gordon’s mansion.

  As soon as the chauffeur had closed the door, Whitehead turned to Petersen and said, “I’m glad he’s your director and not mine. You’ve got a loose cannon on the deck.”

  The Goldman, Sachs partner was at a loss. How could they deal with Gordon?

  “Should we play to his ego?” Whitehead asked. “What should our role be?”

  “Play it straight,” Petersen answered. It was important, he thought, that Goldman not get the impression that there was deep dissension at Getty Oil. If that happened, the investment banker might put the company in play on Wall Street, knowing it would earn huge fees from any takeover deal.

  “None of this makes sense,” Whitehead concluded.

  Petersen often repeated Whitehead’s remarks in the limousine that afternoon to other Getty Oil executives. The Goldman chief had validated Petersen’s own view of Gordon as a flake, a problem child meddling in affairs beyond his grasp. People might not take Sid Petersen’s word that Gordon was irresponsible, but John Whitehead was a well-known and well-respected corporate financier, a man who would soon take a high-ranking position in President Reagan’s Department of State. Surely, his opinion counted for something.

  Petersen emphasized the point because increasingly that winter, Gordon was allying himself with respectable, intelligent critics of the oil business—analysts and takeover specialists and oil men whose opinions might be radical but whose credentials were impeccable. Though Petersen and Bart Winokur were doing all they could to prevent it, Getty Oil was becoming more and more a topic of public comment and speculation; the company’s destiny was being debated in the financial community. For Petersen, a large and aggravating problem was that the financial analysts took Gordon at face value—they took him seriously. They seemed to respect his ideas and his position as a 40 percent stockholder in Getty Oil, as Petersen did not.

  The worst blow had come on Tuesday, February 1, when the oil analyst Kurt Wulff published a special report about Gordon and the future of Getty Oil. A member of the Wall Street brokerage firm of Donaldson, Lufkin & Jenrette, Wulff was regarded as a maverick analyst, brilliant but radical and iconoclastic. His job was to analyze oil companies for his firm’s clients, and to recommend stocks for purchase. Friend and intellectual ally of Boone Pickens, as Pickens rose to influence in the oil business, so did Wulff. Donaldson, Lufkin did not finance or participate in Pickens’ raids, but Wulff provided a kind of intellectual cover for the Texan when the going on Wall Street got tough. In his analyst reports, which enjoyed wide circulation on the Street and in the oil industry, Wulff propounded Pickens’ views nearly to the letter. He described large oil companies like Getty as “obsolete oil megacorporations” and argued that they should be taken over and dismantled into as many as ten separate corporations. Providing detailed financial analysis to support his claims, Wulff said, as Pickens had earlier, that the oil giants were worth more dead than alive. Getty Oil, for example, was valued by Wulff at about $240 a share, more than four times its stock price. He advocated that large stockholders such as Gordon Getty take militant action to force company managements to restructure in order to realize such underlying value.

  For months during the fall of 1982, Wulff had been like a fly buzzing around Sid Petersen’s ear, annoying and elusive. The reports Wulff published and the questions he asked at industry gatherings irritated the Getty Oil chairman because they criticized his style of management, but also because Petersen disagreed with Wulff’s premises—the Getty Oil chairman argued that there was more to a company than its raw assets. But Petersen had assumed that Wulff was just parroting Pickens, and that he had no inside information about Getty Oil. That all changed on February 1, just three weeks after the Bonaventure meeting, when Wulff issued a special report entitled “Oil and Gas Valuation” to his clients.

  The report made clear that Kurt Wulff had been talking directly to Gordon Getty, and that discussions between them had occurred even after the warnings to Gordon by Lasky about contact with outsiders. The report included a flattering biography of Gordon and some general descriptions of the powerful stock position of the Sarah Getty Trust. And then Wulff dropped what Petersen and Winokur regarded as a bombshell: “Mr. Getty is clearly most intrigued with eliminating double taxation by the technique of a royalty trust or limited partnership. It would be presumptuous to say that he has reached any conclusions on that subject, but there is no doubt he has investigated the issues thoroughly.… Mr. Getty is impressed that Boone Pickens was able to form his royalty trust without incurring any initial taxation.”

  That same Tuesday, Wulff released another report, a “research bulletin,” that included a transcript of a breakfast Wulff had recently attended. Wulff was quoted as saying at the breakfast, held at a Manhattan hotel: “My thesis on Getty Oil is that there has been a major change in the ownership of the company and that the new owners want something different from their investment. The major change in the Sarah Getty Trust is that it is now managed by a single trustee, Gordon Getty. Up until last May there were two trustees.… The major stockholders ought to be dissatisfied that the stock market is saying that the company can’t reinvest its money profitably or that something else is wrong. I was greatly encouraged to see that Mr. Getty is strongly interested in enhancing value for shareholders.”

  Wulff was telling all the world what Petersen already knew—Gordon was a loose cannon at Getty Oil. The analyst was also disclosing publicly what for months had been a tightly guarded secret even at Getty Oil headquarters, namely, that Gordon was interested in a restructuring involving royalty trusts or limited partnerships. The disclosure would have an effect on morale at Getty Oil headquarters, Petersen knew. What Petersen and Winokur could not anticipate, however, was the effect of Wulff’s report on T. Boone Pickens, Jr., the dreaded scourge of the corporate oil industry.

  Boone Pickens once remarked that attempting a takeover raid of Getty Oil Company by currying Gordon Getty’s favor was like “going after a puppy with a sledgehammer.” Gordon was the puppy, Pickens the hammer. The comment was suggestive of the ways in which ego and personal power figured in the oil industry takeover wars, which were so often described by men like Pickens and Wulff in the abstract language of economic theory. The plain fact was that Boone Pickens was smarter and hungrier than most of his adversaries in the executive suites or the behemoth
oil corporations—that had as much to do with his success as value gaps or the perceived genius of his restructuring ideas. He was articulate, charming, smooth, and savvy—an oilman in pin stripes. He was a child, literally, of the 1928 Seminole oil boom in Oklahoma, where his lawyer-trained father was wildcatting his way to fortune in the fields. His father traded leases and royalties successfully for a number of years, then began investing directly in wells during the mid-1930s. Five years later, he was broke—“He kept missing” was how Boone liked to describe his father’s predicament. During the war, Boone the elder got a job in a defense plant, and then in 1944 he went to work in Amarillo, Texas, for Phillips Petroleum, a company his son would try unsuccessfully to raid some forty years later. Boone Jr. was an only child. “All the attention was focused on me,” he said later when asked to identify the sources of his intense competitive urges. There was discipline, he said of his early life, and encouragement and love and high expectation. He always felt that he was as good or better than anyone else. He had to win, he said.

  At age fifty, as the chairman and chief executive of a huge independent oil company, Mesa Petroleum, Pickens still felt that way. Acquainted with his father’s misfortunes as a wildcatter, he trained himself not as a lawyer but as a geologist, and he began quickly to drill wells without missing. By the time he launched his takeover raids during the 1970s, Pickens was a confident, experienced oilman, a product of the Texas oil patch, and the wealthy chief executive of a large independent company. But unlike the good old boys, the oilmen like Getty’s former chairman, Harold Berg, who ran the large corporations, Pickens remained ambitious, lean, and aggressive into his middle age. It was a personal edge that set him apart from his peers and colleagues, a sense of leadership and composure.