The Taking of Getty Oil

by Coll, Steve;

  Finally, the game was beyond anyone’s control. In those first weeks after the Hufstedler lawsuit filing, it was impossible for the advisors even to know where their opponents were, much less what they were thinking and planning. There was a great deal of anger and confusion. Late in November, Harold Williams was in Europe on museum business, while Gordon was in New York to attend his fiftieth birthday party and a performance of his Emily Dickinson song cycle. Despite all of the distractions and concerns, Gordon was still composing music every day—he said later that the business and legal pressures that fall seemed only to increase his artistic capacity. His intuition flowed from music to business, then back to music again, he said.

  By the first week in December, Gordon and Williams had reached a tentative agreement: they would combine to sign a majority stockholder consent, forcing Getty Oil to withdraw from the Hufstedler lawsuit. Gordon wanted them to go further—he wanted to return to his proposal in London and use the consent to fire the entire board of directors because of their action. But despite his anger at Petersen and the board, Williams refused to take such a drastic step, which would inevitably draw Wall Street’s rapt attention to the struggle for power at the company. Getty Oil was suffering enough from publicity about its troubles, Williams believed; the last thing it needed was a coup against the entire board.

  Williams and Lipton were nonetheless willing to consider other enforced changes at the company. On Monday, December 5, Gordon and Williams met at Marty Lipton’s Manhattan law offices to draft a document. Williams had just flown in from Europe. They spent most of the day working on the language and provisions—any sudden exercise of majority stockholder power, no matter how justified by management’s behavior, was a legally delicate proposition. Williams, particularly, was concerned about protecting his and the museum’s reputations. He agreed, finally, to a provision establishing a “super-majority” of fourteen out of sixteen directors which would be required to approve any major corporate transaction, such as a stock buy-back, merger, or restructuring. Since Williams, Gordon, and three of Gordon’s nominees were now on the Getty Oil board, the new super-majority would give them effective control over the company’s major policies. Late that night, Gordon and Williams signed the consent, and the next day it was delivered to Sid Petersen at Getty Oil headquarters in Los Angeles.

  Nineteen months after the death of Lansing Hays, then, Gordon Getty had finally exerted formal control over the policies of his family’s business, the giant Getty Oil Company. It had not been easy, nor had Gordon’s ambitions been fully realized. There was still work to be done, he believed. What he did not realize that wintry Monday evening in New York when he signed the consent with Harold Williams, what he apparently could not understand, was that the destiny of Getty Oil was now beyond the influence of any one man. “The events had overtaken us,” was the way Harold Williams described it later. Or, to borrow the metaphor so enthusiastically employed by Bart Winokur at the Bonaventure Hotel eleven months earlier: the blood was in the water now, and it was spreading irretrievably. The sharks would come now. They always did.

  PART THREE

  WHEN THE FAT LADY SINGS

  15

  The Bulldog

  For some, a face is just a mask. Who could look at the drooping, boyish visage of T. Boone Pickens, Jr., for example, with its eyes so modestly averted, its jaw slack and withdrawn—the face of a small-town high school principal—and suspect its owner was a ruthless, indefatigable corporate raider, a man intensely driven to acquire not only wealth, but to achieve recognition, political power, and sweeping reform of American industry? And yet it was precisely the modesty of Pickens’ face, its softness, that lent credibility to his insatiable ambition. Other faces, by contrast, say too much about the men who possess them. When it mattered, no one could believe Richard Nixon; his face betrayed his deceits, as if he were Pinocchio. And then there is the ideal face, the countenance that carefully reflects the essence of its host but does not divulge his secrets. Such a face belonged to John Hugh Liedtke, the chairman and chief executive of the Pennzoil Company, the man who decided in December 1983 that he would like to take control of Getty Oil.

  It was the face of a bulldog, all jowls and jaw and power, carved into a head bigger than a pumpkin. Its skin folded and creased below the ears, like the flaps of a hunting hat, lending the impression of a retired football lineman whose brawn has softened into flaccidity. Still, there was an undeniable strength in Liedtke’s pleated cheeks; there wasn’t anything puffy about him. In the center of his face was a large, bulbous nose, like the anchor of a ship. When Liedtke squinted, his blue-gray eyes disappeared entirely behind the folds of his skin, but when he stared ahead in anger or determination, they beamed like fog lights on an ocean liner.

  Still, the face concealed Hugh Liedtke’s own arcana. It was the face of a plain-speaking oilman, a good old boy, a Texan with mud still on his boots. That was the image of himself that Liedtke liked best, the one he cultivated in public, the one that made him feel relaxed, at home. But it was hardly a full picture of the man. And it did not explain why, that December of 1983, Hugh Liedtke was planning to launch a hostile takeover against Getty Oil Company.

  Hugh Liedtke was a child of the Southwestern oil patch, to be sure, but he was also well schooled in the means and methods of the Eastern elite. He was born in 1922 in Tulsa, Oklahoma, then the center of the world oil industry His father was a scholarly attorney known locally as “Judge,” a magistrate in the Indian Territory and the youngest delegate to Oklahoma’s constitutional convention before becoming regional general counsel for the giant Gulf Oil Corporation. Young Hugh worked summers as a laborer in the Tulsa oil fields, but he also attended private schools and lived in a spacious, luxurious house filled with books. He was an extremely bright student, fascinated by history and philosophy, but he was also something of a prankster, skilled at cards and magic tricks. When it was time for college, Liedtke moved to New England, majoring in philosophy at Amherst and earning a master’s degree in business from Harvard University. In 1943, he joined the navy and served on an aircraft carrier in the Pacific. Twice during the war, he met up with his younger brother Bill, once at Saipan and another time at Okinawa. They shared a few beers and talked about what they would do if the war ever ended and they could return to civilian life. They talked about high finance and the oil business.

  When the opportunity finally arrived in 1946, they decided to go to law school together. They enrolled at the University of Texas, renting rooms from a young congressman named Lyndon Johnson. One of their fellow tenants in Austin that year was a law student named John Connally—in the years ahead, the Liedtke brothers experienced some hard times, but they never knew a poverty of social and political connections. When the brothers graduated, they followed the migrating Texas oil boom to Midland, near the recently discovered Permian basin, where they hung a shingle and began to look for ways to make money. They used their family connections to get started—their father had a friend in Tulsa who had sold his business and was looking to reinvest the proceeds in oil. Hugh and Bill Liedtke agreed to handle the purchases for 5 percent of the price; not a bad beginning for a fledgling law practice. Soon the brothers were making deals all across Texas and Oklahoma, investing in oil well royalties, leases, and finally buying whole groups of producing properties.

  By 1953, the Liedtkes were ready to go it alone, and they formed a partnership, called Zapata Petroleum, with a young, rich, and well-connected Texan named George Bush. They pooled their money and used every penny to buy a six-thousand-acre tract that had on it six producing oil wells, widely dispersed and generally considered to be unconnected beneath the soil. As it happened, the general wisdom was flawed; Bush and the Liedtkes drilled 127 wells on their plot without a dry hole. They were rich now—within two years Zapata was earning $12 million in profits on $86 million in revenues—but they were also heavily indebted because of all their drilling, and so they turned to Bush’s family friends and to t
he Liedtke’s own rich connections to raise more money. The new funds begat new projects, many of them tied together by innovative, sophisticated tax and financing vehicles. By the late 1950s, Bush was pushing to enter the nascent off-shore drilling industry and he asked to take his share of the company public. A friendly divorce was negotiated; the Liedtkes and Bush remained close friends for the next twenty-five years.

  Hugh Liedtke agreed to the separation from Bush because his ambition was not to experiment with off-shore drilling, but to build an American oil company large enough to rival the huge, international conglomerates such as Texaco, Gulf, Shell, and Getty. He pursued this goal assiduously over the next twenty years. The key to his growth was not technical expertise in the oil business, or even exceptional luck as a wildcatter; his success was built on shrewd, sophisticated financial and legal maneuverings—on the application of skills acquired at Harvard and the University of Texas Law School. He pioneered the structural and analytical principles later adopted by others: takeovers based on undervalued assets, financial restructurings to raise stock prices, asset spinoffs to shareholders, and so on.

  It began in 1962, when Liedtke was in Midland, Texas, flipping through Moody’s guide to publicly owned corporations, looking for something in which to invest his profits. He came across an entry for the South Penn Oil Company, based in Pittsburgh, which manufactured the popular Pennzoil motor oil and owned vast reserves in the old Bradford, Pennsylvania, oil field, the first major oil basin discovered in America. South Penn’s shares were then trading for about $28, but its underlying assets, Liedtke figured, were worth far more than that. The problem, he thought, was lackadaisacal management. He decided to invest his money and turn things around himself. With his brother and the usual coterie of family-connected outside investors, he formed a partnership and began to buy up South Penn stock. The company was controlled by J. Paul Getty, who owned just under 10 percent of its shares, but who had taken no active interest in its management. Through a mutual acquaintance in Tulsa, Liedtke contacted Getty and asked him for the chance to run South Penn.

  “You don’t have much to lose,” Liedtke said, referring to the depressed price of South Penn’s stock.

  After some initial reluctance, J. Paul agreed, and Liedtke was installed as president in 1962. He moved to Pittsburgh, implemented dramatic new management and restructuring programs, and more than doubled the price of South Penn stock in just a few years. By 1964, it was clear that South Penn would be Hugh Liedtke’s company for as long as he wished to run it. Homesick for Texas, Liedtke changed South Penn’s name to the Pennzoil Company and moved its headquarters to Houston.

  In 1965, Liedtke shocked Wall Street with his most ambitious gambit yet: a virtually unprecedented $130 million hostile takeover of sleepy United Gas, a company many times larger than Pennzoil. The ploy worked, and it set off a fountain of complex, paper-shuffling deals involving Pennzoil and the Liedtke brothers: stock swaps, asset spin-offs, royalty restructurings, company splits, mergers, and takeovers. In one of the deals, Hugh and Bill Liedtke went their separate ways, Bill taking a piece of United Gas with him and Hugh holding on to Pennzoil, a company devoted solely to oil drilling and marketing. There was talk about a falling out between the brothers, and they did have some differences, but really the cause was Hugh Liedtke’s soaring ambition.

  Through all the deals and manipulations, Hugh had never wavered from his goal to build a major American oil company; and over the next fifteen years, Pennzoil grew and grew. Unlike the salaried managers of the behemoth, publicly owned oil corporations such as Exxon and Getty, Liedtke was not seduced by the glamour of diversification during the 1970s. In a word, he thought the idea was stupid. Hugh Liedtke knew what business he was in—the oil business. That business meant everything to him; he was especially proud of his membership in the All-American Wildcatters Club in Houston, a club whose motto read, “My word is my bond.” Liedtke had absolutely no interest in programming sports television or selling office products, even if such ventures would attract publicity and allow him to circulate in a new, glittering financial society. He did not much care for Wall Street or Hollywood; he preferred Arkansas, razorback country, where he owned a four-thousand-acre ranch for fishing and deer-hunting. When not at his large, waterside estate down on the Houston bayou, Liedtke could often be found parked in a motorboat on one of the lakes at his ranch, his feet propped on the runner, his line trolling behind, his large pumpkin face tucked into his chest. It was the image of a man contented, a wealthy Texan in his element.

  The two sides of Hugh Liedtke—the candid good old boy and the shrewd, connected financial manipulator—always raised questions about Liedtke’s essential integrity and motivations. Most people took Liedtke at face value and praised his uncanny ability to manage growth in the oil industry for the benefit of his stockholders—of which Liedtke himself was the largest with some 358,000 Pennzoil shares, worth $25 million by 1983. It was said that Hugh Liedtke was the sort of oilman who should be running the international giants; he managed a lean, clear-eyed company and did not protect management perquisites at stockholders’ expense. Though it was now a huge, sprawling, publicly owned corporation, Pennzoil retained the culture of entrepreneurship. Its top managers were its owners and they shared the risks of business; not only did Liedtke own a large amount of stock, so did most of the members of his board of directors. Liedtke did not accept Boone Pickens’ liquidation theory of the American oil industry—he desperately pursued growth, not shrinkage—but in nearly every other way he was a model of the styles and strategies advocated by Pickens, and in fact Pickens and Liedtke were friends and sometimes even industrial allies.

  At the same time, however, there were some who questioned Liedtke’s methods. Federal regulators investigated a number of his complex, paper-shuffling deals, and the SEC once forced Liedtke, his brother, and several others to pay back a hundred thousand dollars in profits from stock trading the commission alleged was improper. During Watergate, Pennzoil’s name arose when investigators questioned the use of a company plane to fly seven hundred thousand dollars in Nixon campaign money from Texas to Washington two days before a new disclosure law was to take effect—part of the money was traced to the account of one of the Watergate burglars. Hugh and Bill Liedtke were closely involved in Nixon’s 1972 reelection effort in Texas. Of the decision to let the jet be used, Hugh merely shrugged and drawled, “It seemed like the neighborly thing to do.” No criminal charges were ever brought as a result of any investigation, and most chalked the incidents up to the loose mores of Texas politics and Hugh Liedtke’s unusual enthusiasm for enriching himself and his Pennzoil shareholders.

  By early December 1983, when news of the consent decree giving Gordon Getty and Harold Williams effective control over Getty Oil’s destiny appeared in the financial press, Hugh Liedtke and his Pennzoil Company had reached a kind of plateau. Liedtke was now sixty-one, four years from his official retirement date as Pennzoil chief executive. Over the past twenty years, he had achieved extraordinary success in the oil business, and he had amassed great personal wealth, but he had fallen short of his goal of building a rival to the largest American oil companies. Pennzoil owned some 350 million barrels of oil, enough to rank it eighteenth or thereabouts in size. Exxon, by comparison, owned some 8 billion barrels of oil. Pennzoil had more than eight thousand employees, it ranked first or second in sales of consumer motor oil, and it had sizable sulphur, copper, gold, and other mineral holdings. But the company sold virtually no gasoline, and it had no prospect of increasing its basic supply of oil reserves through exploration: like everyone else in the American oil industry, Pennzoil was selling more reserves each year than it could replace. It was, Boone Pickens would say, in a state of liquidation.

  On December 11, 1983, just six days after Gordon Getty and Harold Williams signed their consent, there appeared in the New York Times a lengthy article about the recent troubles at Getty Oil. Hugh Liedtke read the story with interest. Ever since
the standstill agreement was announced in October, Liedtke had been trying to stay abreast of Getty Oil’s affairs. Now, for the first time, the Pennzoil chairman glimpsed the depth of animosity extant among Gordon, Williams, and Sid Petersen. The Times article reported generally about Gordon’s growing disenchantment with Petersen and it included some details of their defiant confrontation in London early in October. The story made clear that reconciliation between Gordon and Petersen was an unlikely prospect. Even before he read the article, Liedtke had been considering the idea of a hostile takeover attempt against Getty Oil. When he was finished, he felt he understood something about the poisonous atmosphere pervading his target company. He was more certain than ever that Getty Oil was ripe for a takeover raid. If he succeeded, Hugh Liedtke knew, Pennzoil would finally become the oil giant he had long wanted to create.

  Early in December, Liedtke assembled a small team of top Pennzoil executives for a meeting in the thirty-third-floor conference room of Pennzoil’s downtown Houston headquarters. It was the same brain trust that had devised so many of Liedtke’s sophisticated financial deals in the past. Three of them were lawyers: Liedtke; Baine Kerr, Pennzoil’s president and former head of the corporate law department at Baker & Botts, a large and prestigious Houston firm; and Perry Barber, Pennzoil’s general counsel and also a former Baker & Botts corporate partner. The other two, Norman Luke and Clifton Fridge, were accountants and corporate finance experts.

  Fridge presented a number of hypothetical “pro forma” takeover proposals that he had been instructed to prepare. One assumed that Pennzoil would try to buy 20 percent of Getty Oil’s publicly owned stock at $100 per share; Liedtke said that he would then try to make a deal with Gordon Getty to take full control of the company. Other documents assumed that Pennzoil would bid for all of Getty Oil’s publicly owned stock, 48 percent of the total, at $90 a share. Then Liedtke and Gordon would meet and try to split Getty Oil’s rich assets between them, Liedtke said.