The Taking of Getty Oil

by Coll, Steve;

  Pickens himself liked to talk about it. He liked to make fun of the oil executives he played golf with, men so fat and lazy they couldn’t bend over to tie their golf shoes, he said, men who would wander around the course with their shoestrings flapping at their ankles. By contrast, Pickens was in peak physical condition. He could not abide the Texas provincialism of the good old boys, their muddy snakeskin boots and Stetsons and silver buckles, and the way they seemed deliberately to cultivate an ignorance of Wall Street and sophisticated modern finance. Pickens wore immaculate, tailored suits and black wing tip shoes, and he traveled by corporate jet and limousine. He embodied the new, confident Texas so much in fashion during the 1970s and early 1980s. He was articulate and equally at ease with investment bankers and refinery workers. Although there were important economic aspects of the takeover wars Pickens initiated, and he raised important issues in the oil business, most who met him agreed that, for Boone Pickens, a takeover was first about winning. It was about proving that he was better than the entrenched, slothful, self-indulgent corporate executives who opposed him. Boone Pickens thought he was smarter than those executives. He thought he was better. His trick was to get very, very rich proving himself right.

  After he read Kurt Wulff’s report of February 1, Pickens began his run at Sid Petersen, a man Pickens regarded as a mediocrity, and at Petersen’s company, Getty Oil. Pickens knew the gossip in Texas about Gordon’s meetings with the Cullens, but he also knew from Wulff that Gordon was not yet contemplating any direct move against Sid Petersen and the rest of Getty Oil management. Pickens called Gordon in San Francisco.

  “Gordon,” he began, “I’ve never met you, but I appreciate the nice things you said about me to Kurt Wulff.”

  “Well, I’m a big fan of yours,” Gordon replied. “We should get together and talk sometime.”

  “Sure,” Pickens replied. “Let’s do.”

  On Thursday, February 24, Pickens flew his jet into Los Angeles and rode by limousine to the Beverly Wilshire Hotel in Beverly Hills, where Gordon was staying for a few days. Lunch began at 1 P.M. in Gordon’s suite. Pickens brought along one of the top executives from his oil company; Gordon had no lawyers or advisors with him. Pickens considered himself to be in an unusual situation. Normally, if he was interested in taking over a large oil company like Getty, he would just purchase a large block of stock and then launch a hostile raid to buy the rest. That was not possible with Getty Oil, Pickens and his Mesa executives believed. They regarded Gordon as a majority owner of the company, even though he controlled only 40 percent of the stock. Any raid would require Gordon’s cooperation; without it, the attempt would be too risky. Gordon might be a puppy, but he was a very important puppy. The way Pickens and his executives talked about it, they were treating Gordon’s position exactly as Sid Petersen should, acknowledging explicitly that Gordon, not management, was in charge of Getty Oil Company. They were not going to make the same mistake as Petersen, they said, by underestimating Gordon’s power.

  The meeting in Gordon’s room lasted about two hours. “How can we get Getty Oil going?” was Gordon’s question. “What should we be doing?” It was the same question he had been asking all across America.

  “The first thing you’ve got to do, you’ve got to get Sidney on board,” Pickens answered. “Once you have Sidney on board, you can do something with the undervalued assets. You have to advise a plan first as to how you’re going to capitalize on this.”

  Gordon said that what concerned him was the diversification pursued by Petersen and the fact that Getty Oil’s reserve base was rapidly depleting—the base had been built up over decades by Gordon’s father, and now it was disappearing. Gordon also told Pickens that while he was getting tens of millions in annual dividends out of the company currently, that seemed to him only a fraction of the cash he should be receiving. If he had direct access to 40 percent of the profits flowing from Getty Oil’s rich fields, Gordon said, the trust’s income would be something over $700 million annually.

  “Something is haywire at the company,” Gordon said.

  “Something is haywire,” Pickens echoed.

  Pickens told Gordon that he understood his frustration. Gordon was a 40 percent stockholder and yet the company was being run “totally for the management.”

  “You’ve got one of the biggest problems in the business with depleting reserves,” Pickens said. “The company is replacing only a percentage of what it’s producing, and it’s throwing away its cash flow on things like ESPN.”

  Gordon agreed. He told Pickens about his interest in limited partnerships. Pickens responded by saying that he thought royalty trusts were a superior restructuring vehicle. They talked about taxes and the trust’s “zero basis” problem, the fact that if a deal took place, Gordon would have to pay tax on the entire value of the trust’s stock.

  “You know, there’s an opportunity here if we can come up with a good idea,” Pickens said.

  Pickens was subtle and eloquent. He never brought out the sledgehammer. In fact, Pickens would later regard his dealings with Getty Oil as one of the few strategic failures of his corporate raiding career. When he returned to his headquarters in Amarillo, Texas, after his lunch with Gordon, Pickens was so excited about his restructuring ideas for Getty Oil—ideas he asked his staff to develop into detailed proposal books for Gordon and Petersen—that he began to deceive himself a little. He began to think that the restructuring he would propose to Gordon and Petersen was so attractive, so profitable for everyone involved, that the company would be actually excited and pleased to accept. The proposal was called a “reverse triangular merger” and it was a kind of friendly takeover in which Getty Oil and Pickens’ company would be combined into a new, restructured organization designed to elude some of the taxes on oil field profits. Pickens would run the new company, and Petersen would lose his job, but nearly everything else about Getty Oil would remain secure, including its thousands of employees.

  Pickens, however, was not so naïve that he thought Petersen would be pleased to lose his job to the infamous Pickens, so he devised a “golden parachute” severance package for the Getty Oil chairman that was so lucrative, he thought, Petersen would be a fool to pass it up. If he left the company peacefully under Pickens’ plan, Petersen would receive millions in cash, stock options, and shares in the newly formed company—in all, more money than Petersen was likely to make in all his career at Getty Oil. In the weeks after his meeting with Gordon, Pickens consulted with his Mesa executives and met with his lawyers at Baker & Botts in Houston, preparing to make a formal pitch to Petersen and Gordon Getty. Pickens was ebullient. It would be a pleasant change to take control of an oil giant without the pain of a protracted, vitriolic, hostile takeover battle.

  When the proposal was ready, Pickens flew secretly to San Francisco to meet with Gordon at the Broadway mansion. He reviewed his ideas with Gordon and explained the financial benefits of the restructuring for the trust. Again, Gordon did not invite his own lawyers to the meeting with Pickens. He was intrigued by Pickens’ plans and told the raider that he would be interested in pursuing the merger further. Of course, Pickens did not appreciate that for months Gordon had been interested in pursuing a great many things further, but he had yet to arrive at any conclusions.

  Days after his return from San Francisco, Pickens wrote to Petersen at Getty Oil headquarters, briefly describing his merger proposal and asking for a meeting as soon as possible. Petersen was stunned—after all the struggles and strategies and headaches involving Gordon, now he had to contend with the country’s most successful takeover artist. It was not, Petersen felt, what he needed at this time. But Petersen was prepared to do battle; there was no other choice. He consulted with Winokur, whose merger expertise was reassuring, and they decided to inform Pickens that Getty Oil would only consent to a meeting if Pickens agreed to sign a “standstill” prohibiting him from buying Getty Oil stock for several years. Petersen naturally feared that far from wanting
to discuss a “friendly merger,” Pickens was actually preparing to launch a hostile takeover raid. If Pickens was serious about what he said in his letter, if he really wanted to discuss a friendly deal, Petersen said, then he would agree to the standstill. The Getty Oil chairman also insisted that Morgan Stanley & Company, Pickens’ Wall Street investment banker, agree to the standstill.

  There were days of telephone negotiations back and forth, and Pickens finally agreed to sign. It was a decision very much out of character for the Texas raider, who frequently used the threat of a hostile raid as leverage in negotiations. But Pickens genuinely believed in his restructuring proposal; he was convinced that Petersen would be sold on the idea once the Getty Oil chairman understood it. Also, Pickens was reluctant to raid Getty Oil under any circumstances because of Gordon’s huge 40 percent block of stock. Morgan Stanley, however, did not share Pickens’ optimism about the deal, and it refused to go along with the standstill—it wanted to reserve its right to help raid Getty Oil at some future date. Pickens responded by cutting his investment banker out of the deal, and he told Petersen that he would meet with him on his own.

  Petersen selected the luxurious Century Plaza Hotel, just south of Beverly Hills, as the site of his secret summit meeting with Pickens; the last thing he wanted was to have Pickens parading through the halls of Getty Oil headquarters. Pickens flew out from Texas with one of his executives and a tax lawyer from Baker & Botts. Petersen brought along Winokur, Copley, and two of his top finance men. The meeting began around 11 A.M. in a two-room private suite in the hotel’s central wing.

  The tension and fear of the Getty Oil executives was palpable, Pickens thought as the meeting began. Petersen and his advisors watched the raider’s every move as he entered the suite and sat down beside a coffee table. Pickens never carried a briefcase, but he had brought an apple with him from his private jet, in case he wanted a light snack during the day-long meeting. Not having any place to store the fruit, Pickens took the apple from his pocket and set it on the table in front of him just as the meeting began. The Getty Oil executives looked at the apple. What did it mean? they wondered. Was Pickens going to take out a knife and carve it up as a demonstration of his intentions? All through the afternoon, the apple just sat there, and when the meeting was concluded, Pickens retrieved it from the table and put it back in his pocket. Long afterward, the Getty Oil executives remembered the apple and they pondered its significance—was this part of the subtle psychological warfare for which Pickens was renowned? Hardly, Pickens said later when asked about the fruit. He just wasn’t hungry.

  Sid Petersen’s first question as the meeting began was simple and direct. “Have you talked to Gordon Getty?” he asked Pickens.

  “Yes, I have.”

  “When?”

  “A couple of times, recently. He is totally supportive of my aproaching the company with these ideas.”

  “Does Gordon have a copy of the proposal you’re presenting us?”

  “Yes.”

  “What’s the date on his book?”

  “It’s dated earlier than yours. I’m not sure exactly.”

  That was all Sid Petersen needed to hear. For the rest of the afternoon, he never asked another question. His worst suspicions had been confirmed; Pickens was in cahoots with Gordon. Who knew what confidential company data Gordon had given Pickens? Gordon had said nothing to Petersen about his meetings with the Texas raider. Petersen was anxious and concerned. If Pickens was working with Gordon, he thought, then this was not a friendly proposal. This was just a new episode in the widening war between the company and Gordon Getty.

  As he talked to Petersen, and as his advisors described the details of his proposal, Pickens realized that he had miscalculated. He could see immediately that Petersen would never go along; it was written on the Getty Oil chairman’s face. As Pickens watched Petersen that afternoon at the Century Plaza, he was reminded of his own son. When Pickens’ boy got in trouble, when he earned poor grades or violated some household rule, Boone and his son would sit down on the couch and have a face-to-face. Pickens’ boy would clench his jaw during those talks, and his cheeks would begin to twitch with tension. Petersen’s cheeks were twitching, too, that afternoon, and his mouth was tightly shut. It was funny, Pickens thought to himself, that the chief executive of a huge oil company would respond to him like a boy who’d just bashed up the family car.

  The substantive discussion that day centered on the details of a reverse triangular merger. The Getty Oil finance men thought that Pickens’ proposal was deceitful and possibly illegal. It was a two-state deal and required certain filings with the federal Securities and Exchange Commission. But as the Getty finance executives saw it, the proposal required the company to lie about its intentions to investors during the first stage of the deal in order to get certain tax benefits during the second stage. Pickens’ people disagreed with this opinion, and the Baker & Botts lawyer tried to persuade them that they were wrong. Later, the Getty Oil executives would say they turned down the deal because of its potential legal irregularities. Pickens thought that was patently absurd; this was a fine-print issue, he said, and no matter what the Getty Oil executives’ concerns, the problems could be solved through negotiation and compromise. They could even ask the SEC what it thought about the deal. The real problem, Pickens thought, was that Sidney Petersen was scared of him and of Gordon Getty and of any meaningful change at Getty Oil Company. There was nothing he could do to overcome that fear.

  “I’ll tell you one thing,” Boone Pickens said disgustedly to one of his advisors as they walked through the lobby of the Century Plaza after the meeting had ended in failure. “Petersen and those guys are not going to be around that company for very long.”

  It was the sort of prophecy that had made Pickens a very rich man. Ordinarily, he would have enforced his own prediction by launching a hostile takeover raid against Petersen. This time, however, he had outsmarted himself. For once, his intuition wasn’t worth a dime to T. Boone Pickens, Jr.

  8

  For the Old Man’s Sake

  The race was on now.

  Sid Petersen could no longer entertain any illusions about his or Getty Oil’s future. It was clear now that the dam was breaking—so clear, in fact, that as soon as Pickens made his overtures to Getty Oil management, the company’s board of directors authorized new employment contracts for Petersen and Copley. The contracts provided for the very “golden parachutes” contemplated by Pickens, lucrative salary and severance agreements that would yield Getty Oil’s top executives more than $1 million each in cash and stock in the event they lost their jobs in a takeover or restructuring. The rationale for the contracts was that if the executives knew they would become rich even when their careers were ended, then they would have less incentive to protect themselves at the expense of stockholders during a takeover battle. But the contracts did not lessen Petersen’s drive to save his career and his company that spring; there was more than money at stake for a man like Petersen, who had worked long and hard to reach the top of one of America’s largest corporations. The parachute was only a reminder that he had a long way to fall. His efforts were redoubled. The trust had to be neutralized before a hostile raider made a bid for control of the company. Somehow, a lawsuit challenging Gordon’s sole trusteeship had to be instigated, and quickly. Copley’s April meeting with Vanni Treves in London had been encouraging, but Petersen realized now that he had to explore other possibilities as well.

  J. Paul Jr. was six thousand miles away, but in Los Angeles there were other family members who might be willing to take Gordon to court: the Georgettes. George Getty’s three daughters and their children clearly had a stake in the future of the Sarah Getty Trust. Wouldn’t they agree with Petersen that the company and the trust would both benefit by the appointment of a corporate cotrustee to serve with Gordon? Petersen asked Dave Copley to see if he could arrange a meeting. Copley enlisted the aid of Edward Landry, the lawyer who had been so helpful
in arranging meetings with Security Pacific and Treves. Landry called James Isaacs, a Los Angeles attorney who represented two of the Georgettes, Caroline Getty and Claire Getty Perry. Isaacs told Landry that on behalf of his two clients, he would like to talk to someone high up in Getty Oil about Gordon. Landry relayed the message to Copley. On Wednesday, April 27, 1983, a meeting was held at Isaacs’ office.

  Winokur, Landry, and Copley arrived on behalf of Getty Oil. Winokur did most of the talking; he was spending more and more time in Los Angeles now, and the strategic counsel he offered Petersen was increasingly important. Winokur was hardly Getty Oil’s new Lansing Hays—he was a clients’ man, smooth and political, not domineering—but his influence was nonetheless strong.

  “We really think there should be a corporate cotrustee appointed,” he urged Isaacs. “This would give Getty Oil a sense of continuity, and we hope the new trustee would be a harmonizing influence. That would be of benefit to all the shareholders, including the beneficiaries of the trust. Gordon changes his mind about what he wants all the time.”

  “I know Gordon and his personality,” Isaacs said. “But my clients are fond of their uncle. I, myself, can see that a lawsuit would be a good idea. I don’t know what my clients would think. If you develop the idea in specific form, I would be willing to recommend it to my clients.”