The Taking of Getty Oil

by Coll, Steve;

  Fridge handed Liedtke another hypothetical takeover proposal, one for 20 percent of Getty Oil’s stock at $120 a share. Liedtke had not asked for a pro forma at that price—it was much higher than what he wanted to pay for Getty Oil’s shares.

  “I don’t want anything with $120 on it walking around,” Liedtke snapped. “I am looking at a $90 purchase.” Liedtke knew that lawsuits attended any hostile takeover attempt, and that any documents prepared by Pennzoil before a bid would later fall into enemy hands. He did not want it known that anyone at Pennzoil had considered a $120 offer—that might be grounds for a Getty Oil shareholder lawsuit alleging that Pennzoil had bought the company at too low a price.

  Liedtke wanted the $120 pro forma destroyed. Before it was, however, he looked over the numbers in the document: how much Getty Oil’s assets were worth on the open market, how much money Pennzoil would have to borrow, what debt ratios it would have after the deal, and so on.

  “This is still a good deal,” Liedtke told the Pennzoil executives in the conference room. “This is still a very good deal at this price.” The Pennzoil chairman was beaming with pleasure. If buying Getty Oil at $120 a share was a good deal, then taking control at $90 was a financial coup.

  After that meeting in the thirty-third-floor conference room, while the company lawyers and finance experts continued to refine their takeover documents, Liedtke began to widen the circle of knowledge about a possible takeover attempt against Getty Oil. He flew to New York and met on Monday, December 12, with his longtime Wall Street investment banker, James Glanville, of Lazard Frères. Liedtke and Glanville had worked together for years on a plethora of complex financial deals. Though he sometimes decried Wall Street’s unquenchable thirst for transaction fees, Liedtke had respect and even affection for a number of Wall Street bankers and lawyers with whom he worked closely, and Glanville was chief among them. Liedtke’s relationship with the Street was ambivalent. On the one hand, he expressed discomfort about the slick, monied, rapacious culture of Manhattan finance, where no one ever seemed to say what he was really thinking; Liedtke preferred the candid greed of Texas. On the other hand, Liedtke was at least as sophisticated about modern corporate law and finance as many of his Wall Street advisors—manipulations of Pennzoil’s stock and structure had been a key to his remarkable success.

  In Glanville’s Wall Street office that Monday afternoon, Liedtke began to develop the details of his takeover strategy. A hostile bid for Getty Oil was fraught with peril. Because of Gordon’s huge block of stock, and because of the deep distrust between Gordon and Petersen, Liedtke’s success would depend on his ability to forge an alliance with one side or the other. He had to take sides. Liedtke told Glanville that he intended to pursue the same strategy earlier devised by Pickens and Corby Robertson: he would try to make a deal with Gordon. It was the strategy Pickens described as “going after a puppy with a sledge hammer,” and surely Liedtke, with his financial savvy and Texas charm, had as much chance as anyone to hammer a deal with Gordon. Liedtke said later that as he planned his takeover raid against Getty Oil that December, he believed that he would never be able to make a deal with Sid Petersen: the chief executive was the problem, not the solution. Getty Oil had been ruined by Sid Petersen, Liedtke said, by his ill-advised attempts at diversification, by his disrespect for Gordon Getty, and by his bid for glamour and recognition in Los Angeles society.

  “Getty Oil’s troubles began when Petersen took over,” Liedtke said. “Getty Oil had been run by people who were operating people, oilmen. Petersen was not. He was a financial man, and when he took over, the whole focus of the company changed. He wanted to madly diversify like some of the other companies and I think that began the decline in morale at the company.… Even Lansing Hays was in the oil business. He wasn’t off getting into bedsprings and widgets.”

  As Liedtke laid out his thinking to his investment banker, he began to conclude that there was only one sensible way to make a hostile takeover attempt. Pennzoil would announce a surprise tender offer for 20 percent of Getty Oil’s stock at a premium above the market price. Perhaps the offer would be $90 a share, perhaps $100—whatever price was high enough to ensure that stockholders would sell. Liedtke had already made clear, however, that he was not interested in paying as much as $120; even though that still might be a “good deal,” as he had put it, it was too expensive. Getty Oil, with its billions of barrels of oil, was there for the taking at $100 a share. Why pay more?

  Then, having secured his 20 percent, Liedtke would approach Gordon Getty and offer to combine with him to take control of the company and throw out Petersen and the board of directors; this was the step Harold Williams and the museum had been unwilling to take. Depending on how it all went, Liedtke might then become chief executive of a combined Getty Oil and Pennzoil, allowing Gordon the title of chairman, or they might decide to simply split up Getty Oil’s assets, allowing Gordon to carry off a piece of the company for himself and permitting Liedtke to integrate some of Getty Oil’s reserves into Pennzoil. Regardless of the details, the key to the strategy was Hugh Liedtke’s ability to negotiate with and control Gordon Getty. Liedtke had no appreciation of how many people had tried and failed to master Gordon. He might be a puppy, but thus far, every time someone had attacked him with a sledge hammer, Gordon yapped and danced and dodged the blows.

  Hugh Liedtke was a man of confidence and ambition, however, and by the end of that week he had decided to go forward with his plans. Speed was critical; if Getty Oil’s vulnerability was now apparent to Liedtke, then it must also be apparent to other corporate raiders as well. Liedtke’s investment bankers at Lazard Frères advised that a good time to make a surprise hostile takeover announcement was over the Christmas holidays—under federal law, Pennzoil would have to wait about twenty days from the time of its announcement before it could begin to actually purchase Getty Oil shares. The waiting period was designed to give a target company’s management time to devise a response. By bidding over the holidays, when Getty Oil executives and their advisors would likely to be scattered around the world on vacations, Pennzoil’s “Christmas surprise,” as it would become known, could provide Liedtke with a precious strategic advantage.

  On Monday, December 19, a clear and bitterly cold morning in Houston, Liedtke arrived at the Pennzoil Place skyscraper downtown and began to prepare for a meeting of his board of directors. If the board could be persuaded to endorse a bid for Getty Oil—and there was little doubt in Liedtke’s mind that he could convince his directors that the idea was a good one—then the final hurdle would be cleared.

  The meeting in the boardroom lasted most of the day. Predictably, the directors were easily and quickly convinced that Getty Oil was an alluring target. Liedtke ran through a list of the company’s rich assets: its vast oil and gas reserves, most of them “politically secure” in the United States or Canada; its unrivaled Kern River oil field near Bakersfield, California; its gold and copper and mineral holdings; its agricultural land and timberland; and finally, its diversified subsidiaries, ERC, ESPN, real estate, and hotels. Liedtke said that if he gained control, he would move quickly to sell off the subsidiaries—he told his board that ERC, for example, could fetch at least $750 million cash within months after an acquisition. Next, Liedtke passed out the “pro forma” documents secretly prepared by his top staff. They showed what a combined Getty Oil and Pennzoil Company would look like. It was, to say the least, a pretty picture.

  But as the dicussion moved on, the directors, perhaps to their credit, began to express one serious reservation about Hugh Liedtke’s ambitious proposal: the problem of Gordon Getty. Some of the directors had known J. Paul Getty and his family during his days as an oilman in Tulsa, Oklahoma. All of them had read about the terms of Gordon’s proposal to the museum in London. Could a man like that be trusted?

  “Gordon is flaky,” one of the directors said. “He has very little, if any, business experience.”

  “We don’t know what Gordon
’s position will be about our offer. We don’t know if he will even meet with us,” another added.

  Hugh Liedtke was prepared for these doubts; he harbored some of them himself. He told the board that he had talked about this problem with some of his lawyers. They had arrived at a possible solution. Moulton Goodrum, a corporate partner at the Baker & Botts firm, was asked to explain.

  “We need a chance to test the water after we make our offer,” he said. “If the water feels too cold, we don’t want to dive in. We have to see if there is anyone interested in working with us. If we make a tender offer, there is an out, an escape hatch. Under the law, if you think that the value of the shares you are proposing to buy would be diminished because of your purchase—whether because you felt you couldn’t work with Gordon Getty or whatever—then you don’t have to go through with it. We could make that determination during the three-week waiting period after our announcement. Then, if Gordon or no one else will make a deal, we can abandon the tender and be left only with the cost and expenses from the offer.”

  The “out” was critical—no one on the Pennzoil board was yet prepared to commit the company to a working relationship with Gordon Getty. Even if they were able to quickly negotiate a deal with Gordon to take control of Getty Oil, Liedtke and his advisors would negotiate an escape hatch. After one year of joint control, say, Pennzoil would have the option to split off its portion of Getty Oil’s assets and walk away. Gordon would be left on his own with the rest of the reserves. It would later be alleged that this plan was the only one Liedtke harbored seriously, that his goal all along was merely to use Gordon. He would make a deal with the Getty scion to take control and throw out Petersen, negotiate a one-year “divorce” clause with Gordon, and then, when the year was up, walk away with a huge chunk of Getty Oil’s assets. Liedtke denied that he was so devious; anything was possible after he made his hostile bid, he contended, even a negotiated arrangement with Sid Petersen. Still, at the board meeting in Houston that Monday, Liedtke made a point to emphasize the escape hatch he would seek from Gordon.

  “Any part of any plan we would enter into with Gordon would have to include some way for us to get out,” Liedtke told his directors. “We’ll attempt very quickly to get with Gordon and/or the museum and/or the company and see if we can’t play a constructive role in putting together a restructuring to resolve this dispute. But Gordon is the one we’ll have to deal with.”

  After hours of discussion about Gordon’s changeable character and about the ways Pennzoil might be able to protect itself in any deal with him, the board finally authorized Liedtke to proceed with a hostile takeover. The directors granted their chief executive wide latitude in any future negotiations with Gordon, the museum, or Getty Oil’s representatives. Liedtke’s best judgment was good enough for the board. So many times in the past, the Pennzoil chairman had pushed his company into dangerous, complex takeovers and restructurings, and nearly every time, he had won handsomely.

  Of course, he had never before played a game with Gordon Getty.

  16

  Buyers and Sellers

  A chill rain was falling in San Francisco on Tuesday, December 27, but once again Gordon Getty’s Broadway mansion was basking in holiday warmth. The Christmas trees had been raised, including the traditional family teddy bear tree. One year before, when he retreated to his basement study and wrote a glowing letter to Sidney Petersen, Gordon had seemed infected by the spirit of the holidays; his good will extended even to his adversaries at Getty Oil, who were at the time formulating secret plans to launch a family lawsuit against him. To Gordon, the future of Getty Oil had seemed bright with promise. Now so much was changed. Gordon felt little but disgust and contempt for the company managers and advisors in Los Angeles. He wanted very much to overthrow Sid Petersen and the board of directors. Only the reluctance of Harold Williams prevented him from doing so.

  Gordon was not terribly distraught, therefore, when Moses Lasky telephoned him that Tuesday afternoon to say that the Houston-based Pennzoil Company had announced a hostile tender offer for 20 percent of Getty Oil’s outstanding stock. Gordon believed that hostile takeovers were good for the nation’s economy; they kept entrenched managers like Sid Petersen on their toes. His initial reaction was that Pennzoil’s bid was perhaps less a threat than an opportunity. This was not because he knew very much about Pennzoil. He had never heard of Hugh Liedtke. Indeed, what Gordon knew about Pennzoil was confined to impressions gleaned from the company’s television commercials for motor oil, which featured the golfing legend Arnold Palmer and his tractor. Gordon said later that he did not believe Arnold Palmer was Pennzoil’s chief executive, but beyond that, he had no real knowledge about the company. He was surprised to learn that Pennzoil owned hundreds of millions of barrels of proven oil reserves, and that its holdings ranked it in the top twenty among American oil companies.

  Shortly after he heard from Lasky that Tuesday afternoon, Gordon received a call from Marty Siegel, who was vacationing with his family in the Virgin Islands. So far as Siegel was concerned, Pennzoil’s holiday offer had been a Christmas surprise indeed—Siegel was staying in a hotel room with no telephone, and when Pennzoil’s announcement came over the ticker tape in New York, Siegel’s partners at Kidder, Peabody had been forced to employ a messenger in the Virgin Islands to transmit the news. When he got the message, Siegel found a public telephone and called his client in San Francisco.

  “If there’s going to be a Pennzoil tender offer at $100 per share, and if no other alternatives become available to the public stockholders, then I think it will be a successful offer—Pennzoil will get the full twenty percent,” Siegel told Gordon. “There is a considerable danger that this could lead to Pennzoil somehow assuming a majority position and locking out you and the trust. But we can also look on it as a promising development, an opportunity.”

  Gordon agreed that there was reason to be optimistic about the hostile bid. His family might not see it that way—in the pending lawsuit they had filed against him, with Getty Oil management’s assistance, the trust’s beneficiaries alleged that Gordon’s behavior might lead precisely to his present dilemma, with the family fortune mired in a takeover war with an outside raider. But after all, Gordon had said all along that his goal was merely to “maximize” the value of his family trust’s stock holdings. A year before, that stock had been worth only $50 or $60 per share. Now, apparently, Pennzoil was willing to pay $100.

  Gordon instructed his investment banker to return to New York as quickly as possible. Siegel said that he would cut his vacation short and catch the next plane out of the islands. The largest company ever put into play on Wall Street was now effectively on the auction block and Siegel had a contract for a percentage of the deal. For the sake of his client, and for the sake of his firm, there was no time to waste.

  By late that Tuesday afternoon, all of the Wall Street advisors had been fully mobilized. There was a new player now, Pennzoil, represented by Jim Glanville of the Lazard Frères investment banking house. Glanville was an experienced merger partner who specialized in the oil business, and was considered as capable and aggressive a banker as any. His senior partner in the Lazard merger division was Felix Rohatyn, perhaps Wall Street’s most celebrated investment banker. Rohatyn had made his reputation working for the trailblazing conglomerate ITT during Wall Street’s so-called go-go years, the 1960s. In that era, ITT bought and sold subsidiary companies in unrelated businesses as if they were interchangeable parts of some great industrial kaleidoscope. Rohatyn earned millions shepherding the deals. During the 1970s, through his stewardship of the Municipal Assistance Corporation, Rohatyn gained equally prodigious fame by rescuing New York City from bankruptcy. Later he took charge of the Lazard merger division and began to contribute long essays to the intellectual press about the terrible dangers of merger mania, even as he continued to broker deals for his firm.

  Naturally, because of their places in Manhattan’s financial society, both Rohatyn
and Glanville had developed close professional and personal relationships with Marty Lipton. Glanville had figured that since Lipton’s client, the museum, owned 12 percent of Getty Oil, and since it was caught precariously in the middle of warring between Gordon and Petersen, Lipton and Williams might be willing to sell their shares to Pennzoil once its hostile tender offer was announced. That Tuesday morning, December 27, Glanville had telephoned Lipton and asked him to lunch.

  At the restaurant, Glanville told Lipton that he had something “very important” to discuss with him, but that he was not quite ready to talk about it yet. To the two old merger hands, Glanville’s cautious statement was a familiar kind of code: a big deal was in the works, he was saying, and Lipton would be involved, but Glanville could not identify the companies until an announcement went over the ticker tape. Lipton asked if perhaps Glanville would be ready to discuss the matter in the evening, after the stock market closed—major takeover announcements were often made around five o’clock New York time, so that chaos would not erupt on the trading floor. Glanville answered that yes, he might well be ready by evening, and so Lipton invited his friend to dinner at his luxury apartment.

  Glanville arrived at Lipton’s place at about seven-fifteen; news of Pennzoil’s tender offer was already on the wire.

  “I think the most appropriate thing to do would be to call Mr. Williams and tell him immediately about Pennzoil’s offer,” Lipton told Glanville. “I could put you on the phone with Williams right now.”

  Glanville said that he had a strong desire to talk with Mr. Williams about Pennzoil’s intentions.

  Lipton telephoned his client, quickly transmitted what he knew about Pennzoil’s bid, and then handed the receiver to Glanville.