The Taking of Getty Oil

by Coll, Steve;

  “I met with Harold last week,” Petersen told Cohler on the telephone when the lawyer asked if Williams, who was aware that Goldman had been retained, could attend Gordon’s Thursday briefing. “I got the impression that Harold really is not up to speed as to what Goldman, Sachs has been doing, what the analyses are, what kinds of studies are being undertaken.”

  Cohler said that he had no reason to doubt Petersen about that. Still, the chairman’s assessment seemed to support the idea that Williams should attend the Goldman briefing.

  “Greg Robertson—the Goldman partner in charge of the studies—is concerned that Gordon doesn’t really have a lot of confidence in what Goldman is doing,” Petersen answered. “Robertson wants some time on Thursday where he can just be alone with Gordon, just to get his confidence up. He doesn’t want a big meeting with management people or outsiders present as well.”

  “Well, I would like to give Harold the Goldman black books, the ones they finished in June,” Cohler said. “Is there a problem with that?”

  “That’s fine, if it will help to get Harold up to speed. But I don’t want you to give him anything before the directors have seen Goldman’s presentations at the board meeting on Friday.”

  “No problem,” Cohler answered. “Tom Woodhouse and I will go see Harold at the museum offices at the same time you’re having your board meeting. So there won’t be any problem of diplomacy with Harold getting the books before the directors do.”

  “That’s great,” Petersen said.*

  Cohler also telephoned Dave Copley to get assurances that there would be no votes taken at the Friday board meeting. The plan was for Cohler and Woodhouse to meet with Williams at the museum’s offices in Century City while Gordon attended the board meeting at Getty Oil headquarters across town. Then, if all went well, they would arrange a face-to-face meeting between Gordon and Williams and they would inform Petersen and Copley about Gordon’s plans for an LBO takeover.

  Cohler’s strategy succeeded. Gordon’s briefing on Thursday went well, although there was a moment of discomfort when Gordon discovered that Goldman, Sachs had included a hypothetical case study in its black books that analyzed the effects of various deals on a “zero basis” shareholder, that is, one who had acquired his stock in Getty Oil back in the 1930s, when it was worth very little. To Gordon, this seemed a thinly disguised analysis of the Sarah Getty Trust’s position. He said that he had explicitly requested that no special attention be paid to his family fortune—this was supposed to be a study for all shareholders. Gordon announced forcefully at the briefing that he wanted these case studies removed before the black books were presented to the Getty Oil directors. The outburst seemed to unnerve Greg Robertson, the Goldman vice-president making the presentation, and it certainly did not contribute to Robertson’s goal of building Gordon’s confidence in his firm’s work. But no one in the room believed that Robertson personally was at fault, so the briefing concluded amicably. Meanwhile, Cohler and Woodhouse flew down to Los Angeles from San Francisco carrying a set of black books for Harold Williams.

  Friday morning, as Gordon drove from his hotel to Getty Oil headquarters for the board meeting, Cohler and Woodhouse arrived at the museum offices on the twenty-third floor of the prominent Century Park East Tower. They would spend the day reviewing with Williams the confidential details of Getty Oil’s finances and discussing Gordon’s idea for an LBO takeover “with a fence.” Moses Lasky was back in San Francisco; Gordon would be on his own at the directors meeting across town.

  As they filed into the board room on the eighteenth floor of Getty Oil headquarters that Friday morning, the directors were confronted by indelible images from the company’s long history. On the walls were pictures of the Gettys who had served on the board over the years: George Getty I, J. Paul, George Getty II, and finally, the only survivor among them, Gordon. The windowless interior room was dominated by a long, winged conference table, which was surrounded by deep, studded-leather chairs. At the center of the table, where its parallel wings converged, was a seat sometimes called the “cockpit,” from where Sid Petersen, the chairman, always presided. This morning, Petersen knew, he would have to pilot his board as never before.

  “As I indicated in my letter of June 15, we have retained some consultants to study strategic planning issues for the company,” Petersen began after some routine, preliminary business was dispensed with. “The purpose of the study was to identify ways the company might enhance shareholder wealth. Ever since 1979, when Boone Pickens issued the first royalty trust in the oil industry, I have followed the development of royalty trusts both as a financing tool and as a means of distributing cash to shareholders. Similarly, I have also followed the development of limited partnerships as a way to raise money and reward stockholders.”

  Petersen paused. He was going to lay out some version of the past year’s events to his directors now, but he had to be very careful. Gordon was sitting right there at the table. Petersen did not want to provoke him.

  “Late in September, 1982,” he said, “Gordon Getty requested that the company undertake additional studies about the desirability of using a royalty trust for the purpose of enhancing shareholder wealth. Those studies were undertaken, and in addition, we performed a series of in-house analyses on limited partnerships. All of these studies were furnished to and reviewed by Mr. Getty and his lawyers. The in-house studies were essentially completed by year-end. In January, however, Gordon Getty said that he felt it was desirable that the company’s studies be reviewed by an independent investment banking firm, and that the firm give consideration to the liquidation of Getty Oil Company—in whole or in part—into limited partnerships. Gordon said that he was willing to undertake such a study, and to retain the investment banker, on behalf of the trust.

  “In my judgment, having Gordon undertake the study independently from the company and its management might well be disruptive. Also, that procedure did not readily adapt itself to permitting Getty Oil to furnish the investment banker the confidential and proprietary information required to perform the studies. Because of that, I agreed to have the studies desired by Mr. Getty performed at the request and expense of the company.”

  Then Petersen mentioned the price tag—the studies had cost in excess of $1 million.

  He explained that Goldman, Sachs had been retained in February by mutual agreement with Gordon, and that the firm had been chosen by virtue both of its reputation and the fact that it had never worked for Getty Oil before. The studies had proceeded as planned, Petersen said, and Goldman had examined both the royalty trusts and partnerships identified by Gordon as well as other restructuring ideas suggested by Getty Oil management and the investment firm itself. Now Goldman was ready to make its presentation to the board, Petersen said.

  The chairman asked someone to call the advisors into the board room. Greg Robertson, Robert Hurst, and Peter Barker of Goldman, Sachs stepped inside, as did Bart Winokur and Steadman Garber, who had worked closely with Goldman in recent weeks on Petersen’s behalf. Hurst, a young, lean, smartly dressed man who looked very much the part of the modern Wall Street banker, distributed the black books and prepared to make an introduction.

  “You’ll notice,” he said as the directors began to open their books, “the items referred to in the presentation outline as ‘9.C’ and ‘10.C’ are not in the books you have been supplied. This was done at Mr. Gordon Getty’s request.”

  Petersen intervened. “The removal of those pages is subject to reconsideration.” It was not clear whose reconsideration—his or Gordon’s.

  “Why were they taken out?” asked John Teets, the Greyhound chairman. Teets was a blunt, plain-spoken man. As he listened to Petersen’s cautious, winding speech moments before, he had wondered what the hell was going on at Getty Oil Company.

  “The sheets that were taken out referred to the Sarah Getty Trust,” Gordon answered. “I wanted the trust to be considered just as any other shareholder.”

  As
Hurst began his presentation, he suggested that this had been part of Goldman’s problem all along. “The objective of our assignment was easy to state but hard to define in many respects,” he said carefully. “The ‘enhancement of shareholder wealth’ depends on the position of each shareholder—such as the shareholder’s objectives, his price basis in the stock, and the tax consequences of any specific course of action to that shareholder. We approached the assignment with the idea that there should be an affirmative, long-term impact in any restructuring, not a one-shot impact.”

  Hurst began to review the thick black books in detail. There were a number of things that Goldman had specifically not studied, he quickly pointed out, such as the size of the company’s value gap and the impact of any restructurings on company employees or on the cities and communities where Getty Oil was a major employer. The firm had also been forced to make a number of assumptions, most importantly about the future world price of oil and gas. Accepting these caveats, however, Hurst went on, Goldman had completed a thorough evaluation of all the alternatives suggested by Gordon and Petersen.

  “Some of the alternatives you see outlined could present serious structural problems if you tried to actually implement them,” Hurst said. “Sometimes an alternative which might appear attractive in the abstract is actually impractical. For example, you could not turn all of Getty Oil into a six-billion-dollar limited partnership—a partnership so large could not be absorbed by the market, even if it was possible to assemble it properly. At the present time, the total of all royalty trust and limited partnership interests available on the market is estimated to be something less than two and a half billion dollars. You would oversaturate the market.” Hurst’s point was clear: Goldman believed there were sharp limits to the ideas advocated by Kurt Wulff and Boone Pickens for a company the size of Getty Oil. There was some question as to whether Gordon had ever considered these elemental practical problems.

  “Others of the alternatives would leave the company with serious credit problems,” Hurst went on. “Getty Oil’s stock price is quite volatile—it’s picked up thirty percent in value since Goldman began its work.

  “Of course,” Hurst added, pointing out what Sid Petersen knew all too well, “there have been some analysts commenting for some months on the possibilities of the company creating a royalty trust or a limited partnership, and also on the possible takeover of the company. There could be a touch of ‘merger premium’ in the current price of the stock.”

  That was one way to put it. There was another way: Gordon’s meanderings on Wall Street had caused the value of his family fortune to rise by nearly one-third, largely due to speculative trading in Getty Oil’s stock.

  For hours, the board room presentation dragged on. Hurst and Greg Robertson reviewed the technical details of their various analyses, answered questions, explained their methods, and otherwise attempted to justify the fees their firm commanded. They were eloquent, articulate, intelligent; the success of their work depended on an ability to personally impress the directors of large corporations.

  Finally, Hurst offered his summary and conclusions.

  “From a financial perspective, on a longer-term basis, a stock buy-back program appears to create more enhanced value for shareholders than any of the other alternatives we looked at.

  “If you consider the impact on Getty Oil itself, a buy-back program is the least onerous alternative. It gives each shareholder the maximum flexibility to make individual investment decisions. It’s also quite straightforward and simple to execute, and it permits the board to determine and redetermine from time to time the number of shares to be brought back—in light of market conditions or other factors. If you pursued a buy-back program, you could still consider some of the other alternatives—the royalty trust, limited partnership, and so on—at some later date.”

  That was it. A stock buy-back plan, where Getty Oil would repurchase its own shares in the market, thus raising the value of all the remaining shares, including those controlled by Gordon. It was, of course, exactly what the company’s directors had authorized way back in April 1982, before Lansing’s death, before Gordon’s insistence on new studies had forced Petersen to suspend the program.

  As Chauncey Medberry now put it angrily, speaking directly to Gordon across the table, “You mean, we spent one million dollars to find out that something we decided more than a year ago was right?”

  Petersen was in a precarious position. There was an opening here, a chance to alert the board to the full extent and nature of his problems with Gordon. But he could not take the lead; the directors would have to draw their own conclusions about what Gordon had done. Petersen knew, too, that he could take no votes today; that had been agreed to beforehand with Cohler. So he suggested that if there was a consensus among the directors that a buy-back program should be reinitiated, then he would order an internal Getty Oil management study to determine what the most beneficial program would be. For one thing, Petersen knew, any buy-back would have to stop short of raising Gordon’s stock holdings to a majority percentage. Gordon now had 40 percent; if the company repurchased and retired more than 10 percent of its outstanding stock, Gordon would suddenly own 51 percent. He would instantly have control.

  But the directors were not thinking so far ahead. This was their first chance to speak with Gordon about his actions during the last six months. Most of them knew about the Kurt Wulff reports. A few had heard in more detail about the tension between Gordon and Petersen. The directors thought, nearly to a man, that so far as they could tell, this whole charade with Goldman, Sachs had been an appalling waste of time and money. Some of them were upset at Petersen, who had gone along with it, but they were even more angry at Gordon, who clearly had insisted that Goldman be retained.

  Teets, the newcomer, took the lead, grilling Gordon about what Hurst had said. The board could not authorize any buy-back program until Gordon agreed that all of the studies about royalty trusts and limited partnerships and other financing tricks were finished, done, completed, finito.

  “Gordon, there can be no more,” Teets insisted. “Do you agree?”

  But Gordon was in a difficult position. He knew, as he listened to Teets, that his lawyers were across town meeting with Harold Williams, discussing a possible LBO takeover of Getty Oil. But he did not know yet whether Williams favored the deal or not. He could hardly disclose his plans openly to the board before he knew what Williams thought. Besides, Gordon was in fact still tinkering, still thinking that July afternoon. He relied on his instincts, and his intuitive feeling was that not enough had yet been done to explore a restructuring or an LBO takeover.

  “I think that additional alternatives should be considered,” he told Teets.

  The Greyhound chairman continued to press. “Gordon, what is it you want? What are your goals? Tell us, so we can understand what you’re doing.”

  Gordon paused, and then answered philosophically. “What I really want to do is find the optimum way to optimize values.”

  Teets leaned on the board table. “Gordon, you may know what you just said, but nobody else in this room does.”

  Other directors began to join in, men such as Harold Stuart, who had sat on the board with Gordon for more than six years. Their comments were addressed mainly to Gordon, but the message was aimed at Sid Petersen as well. There was no screaming or profanity; that was Lansing Hays’ style, now behind them. But the directors said unequivocally, and in firm tones, that this studying and tinkering had to end. Immediately. The studies were too expensive, they said, they were unnecessarily disruptive, and they prevented management from carrying out sensible programs such as the stock buy-back or a restructuring of Getty Oil’s debt. If Gordon had ideas for any other alternatives, the board would consider them if and when Gordon was prepared to make a full presentation. Gordon said little in response.

  Capitalizing on the board’s disgruntlement, Petersen shifted the topic to Gordon’s dealings with Boone Pickens and to t
he meeting Petersen had held with Pickens at the Century Plaza Hotel. Calmly, without explicitly criticizing Gordon, the Getty Oil chairman described the sequence of Pickens’ proposals—first to Gordon, then to management—and the details of his proposed “reverse triangular merger.” Quickly and directly, Petersen told the board that he had personally decided that “no consideration should be given” to the deal, and that he had told Pickens as much. Casting a few sidelong glances at Gordon, the directors told Petersen they supported his position.

  With that, the meeting adjourned. The directors gathered their things, stood to chat casually, and began to drift into the hallway on the executive floor. Gordon approached Petersen and asked if they could speak privately in Petersen’s office.

  When the door was closed, Gordon said: “I have a list of three things that I am interested now in studying. The first priority is a possible leveraged buy-out—with a fence—of the entire Getty Oil Company. This would be done in conjunction with the museum—we would be partners, in control of fifty-two percent of the stock. I would like Goldman, Sachs to undertake a study of whether this would be feasible.”

  Gordon launched into an enthusiastic speech on the potential attractions of an LBO. He displayed no hostility or defensiveness about what had just passed in the board room. He was the same Gordon, the idea man—his long, thin hands gestured in emphasis, his eyebrows flexed up and down, his brow furrowed in professorial seriousness. He said that if a leveraged buy-out didn’t work, then he wanted to dissolve the company into a partnership. If that didn’t work, he said, his final alternative was a simple liquidation of Getty Oil Company.