The Taking of Getty Oil

by Coll, Steve;

  Certainly, that ethic was in keeping with John McKinley’s own upbringing. His father, Virgil, an industrial management professor at the University of Alabama, was forty-six when McKinley was born. A strict man, Virgil McKinley was also a Baptist Sunday School teacher and an avid hunter, an avocation he passed on to his son. Though he saw most corners of the world, John McKinley remained at heart an Alabaman, a “very manly guy,” as one of his friends put it, a Southerner imbued with the stiff discipline of the local football coach in Tuscaloosa, the legendary Paul “Bear” Bryant. As a captain during World War II, McKinley saw combat action in Europe and earned the Bronze Star. Upon his return to the United States, he joined Texaco as a chemical engineer and stayed for more than thirty years, rising through the company’s hierarchy. His mentor, beginning in 1960, was Maurice Granville, who became chairman and chief executive in 1971. Granville promoted his protégé from the Texaco petrochemicals division to the post of president, and for nine long years, McKinley waited for his opportunity to finally take charge. Granville, like Augustus Long and the others before him, jealously guarded his decision-making authority before retiring in 1980. By then, it was clear that Texaco was facing a number of serious threats to its core businesses.

  Since Granville had never effectively responded to the upheaval in the oil industry caused by OPEC, John McKinley came to power at a critical moment in Texaco’s history. The company’s downstream operations—its refining and marketing divisions—were collapsing under the pressure of aging plants and higher oil prices, which squeezed profit margins at the retail gas pump. More ominously, Texaco’s basic oil and gas reserves were disappearing at an alarming rate—the company was running out of oil even faster than its besieged competitors, and it was having poor luck in exploration. Unleashed after nine years as Granville’s second in command, McKinley moved decisively during the first years of his regime. He shut down half of Texaco’s domestic gas stations, six of its fourteen refineries, and he modernized four other refineries. Willing to accept the hard truth about the company’s rapidly depleting reserves, he approved major write-downs of previously bloated natural gas reserve estimates. And most boldly of all, he threw some $6 billion at Texaco’s explorationists, hoping to turn up a dramatic new oil strike that would reverse the outward flow of the company’s basic reserves.

  A number of McKinley’s reforms, though autocratically implemented, were nonetheless effective. The refining and marketing division, under Jim Kinnear’s immediate supervision in Houston, Texas, staged an impressive turnaround. But by the fall of 1983, when news of dissension and turmoil at Getty Oil began to leak into the financial press, Texaco’s recovery was far from complete. Despite the billions spent on exploration, Texaco, like its competitors, remained in what Boone Pickens would call a state of liquidation. It was selling its reserves much faster than it could replace them. Not only had the company failed to turn up any major discoveries, its average per-barrel “finding cost”—the amount of money required to discover a single new barrel of oil—was running as much as 50 percent above the industry mean. Under McKinley, Texaco had to spend between sixteen and twenty dollars per barrel in exploration costs, compared to an industry average of about twelve dollars. These high costs largely reflected the accounting consequences of an ambitious exploration program undertaken by McKinley. Still, there was a heightened mood of expectation and hope inside the company. Late in 1983, McKinley’s hopes rested with an ambitious, highly expensive, collaborative oil exploration project known as “Mukluk,” off the coast of Alaska. But the well turned out to be the most expensive dry hole in history, and when news of the failure reached Texaco’s headquarters in White Plains, McKinley knew that he would have to pass a large exploration write-off along to his stockholders. McKinley said later that the fiasco at Mukluk played a “subconscious” part in his decision-making during the first days of January 1984.

  McKinley maintained a home in Tuscaloosa, Alabama, and he was there with his wife on Wednesday, January 4, when Al DeCrane called from White Plains to report on his latest conversation with Geoff Boisi. The relationship between Texaco’s chairman and its president was formal, guarded, and unemotional, as were most of the relationships among top company executives. DeCrane, a youthful-looking, black-haired, bespectacled executive with an emphatically dispassionate manner, was in the midst of a subtle succession struggle with James Kinnear, Texaco’s Houston-based vice-chairman and, on paper at least, DeCrane’s equal in the Texaco hierarchy. Since DeCrane was in New York, however, working closely with McKinley, most company insiders figured that he had the inside track to the chairmanship when McKinley retired. McKinley, of course, was offering no guarantees.

  The question of whether or not Texaco should bid for control of a rival oil company as large and rich as Getty Oil was a delicate one for DeCrane, even apart from its implications for the tangled politics of corporate succession. Certainly, DeCrane had to bring Boisi’s suggestions about Getty Oil’s availability immediately to McKinley’s attention. But he could hardly presume to speak for the Texaco chairman. Hostile takeovers were a sensitive subject at Texaco headquarters. For decades the company had made it an informal rule, as a matter of both business practice and moral principle, that it would never make an unsolicited or unwanted takeover offer for another company. Texaco was perfectly willing to involve itself in a “friendly” merger at the polite invitation of another company’s management. But it refrained from alienating the affections of other chief executives by attempting to acquire that which a seller was unwilling to part with.

  Since all they knew about the situation at Getty Oil was what they read in the newspapers and what DeCrane gleaned from his brief conversations with Boisi and one or two other Wall Street bankers who wished to represent Texaco in an acquisition, it was hard for Texaco’s top executives to be sure that Wednesday what kind of situation they were presently in. A policy of noninvolvement in hostile takeovers had been more easily adhered to in decades past, during the long era of unbridled prosperity and easy comradeship in the oil industry. But during the early 1980s, with Wall Street-funded aggressors such as Boone Pickens suddenly on the prowl, the mood in the oil patch was changed. There was less certainty, less stability, less trust. The merger bankers on the Street, with their deeply ingrained financial incentives, were the conduits of critical information. For Texaco, the acquisition of Getty Oil at the price levels being suggested by Goldman’s Geoff Boisi—something over $120 per share—would represent a dramatic and inexpensive expansion of the company’s reserves. If it acquired Getty, Texaco would virtually double its domestic oil reserves at a price somewhere around five dollars per barrel.

  Such a bargain could not easily be ignored. But DeCrane and McKinley had been in this situation before, and they had been badly burned. Just over two years earlier, in July 1981, Seagram’s, a diversified conglomerate best known for its whiskey, had made a hostile bid for Conoco, an oil company somewhat smaller than Getty Oil. Under siege, Conoco’s chief executive, Ralph Bailey, had contacted McKinley to see if Texaco might be interested in rescuing his company from Seagram’s clutches. Bailey knew that Texaco was after cheap oil reserves. McKinley told Bailey that he was only interested in making an offer if Bailey and his board of directors wanted to receive it; the Texaco chairman would do nothing “unfriendly.” McKinley said further that if Bailey was willing to accept, Texaco was prepared to offer $85 per share, in cash, for all of Conoco’s stock, a price higher than Seagram’s original offer. A short time later, however, Bailey called back to say that he preferred not to make a deal with another oil company. Instead, he told McKinley, he was going to accept a takeover offer from Du Pont, the chemical giant, for somewhat less than $85 per share—and not all of it in cash. Bailey never said why he preferred to accept an inferior offer from Du Pont, but McKinley suspected it was because there was a greater chance that Bailey could retain his job if he was swallowed by a company with no oil expertise. There was some disappointment at Texaco
over this missed opportunity, especially since McKinley could easily have won control if he had pressed his superior offer in an unfriendly way. Still, despite the disappointment, the Texaco chairman reendorsed his opposition to hostile deals. At the same time, though, he vowed that his company would work harder to close a merger if an opportunity as favorable as Conoco ever presented itself again.

  Thus, the news on Wednesday that Sidney Petersen and the Getty Oil board of directors were looking for assistance from a “white knight” such as Texaco to rescue it from Gordon Getty and Pennzoil was greeted with a special sense of urgency in White Plains. Here, in the aftermath of the Conoco failure, was an opportunity for John McKinley to complete the turnaround at Texaco that he had been pursuing since his ascension to power some four year earlier.

  “I think that if we wish to make a bid for Getty Oil, prompt action should be taken,” DeCrane told McKinley when he called the chairman at his Alabama home on Wednesday morning, moments after he had been assured by Boisi that despite the press release’s references to an “agreement in principle,” Pennzoil and Gordon had not yet closed a deal.

  “We’re having studies made about Getty Oil’s finances,” DeCrane continued. “When will you be up here?”

  “I’m flying up this afternoon,” McKinley answered. “You go ahead and continue the investigations of all aspects of a bid. I’ll meet with you when I arrive.”

  There was a Texaco corporate jet waiting for McKinley at the University of Alabama’s airport. He arranged for a pilot to fly him up to White Plains at noon. Before he left, however, McKinley spoke with his golfing partner at Goldman, Sachs, cochairman John Weinberg, to be certain that what DeCrane was reporting to him was true. McKinley wanted to know whether what Boisi had said was accurate, that there was no deal between Getty Oil and Pennzoil and that Sid Petersen and his directors would like to receive a friendly offer from Texaco.

  Wenberg said that was correct.

  So John McKinley drove out to the Tuscaloosa airport, climbed aboard his waiting jet, and flew off to Texaco’s headquarters in White Plains. It would take about forty-eight hours to close a deal of this magnitude. No one at Texaco wanted to let this one slip away.

  22

  Bruce the Moose

  What Texaco needed that afternoon was an investment banker. McKinley knew as he flew north to White Plains that a kind of Wall Street feeding frenzy had erupted around Getty Oil—he knew it because bankers and lawyers were calling DeCrane, himself, and other Texaco executives every few minutes, seeking information, offering unsolicited advice, and above all hoping to be retained at the usual rates. Of the leading merger houses on the Street, there were only two (not counting dreaded Drexel Burnham Lambert, home of the hostile takeover artists, which McKinley would not have hired if it was the last firm on the planet) that were not already retained by one of the parties to the deal. Goldman, Sachs was already down to Getty Oil; Salomon Brothers to the museum; Lazard Frères to Pennzoil; and Kidder, Peabody to Gordon Getty. Of the two major firms still available, Morgan Stanley & Company, led by the semilegend Robert Greenhill, one of the early procreators of merger mania, was the obvious candidate to represent Texaco.

  Like Goldman, Sachs, Morgan Stanley catered to the board rooms of the Fortune 500; like Goldman, too, it was regarded as a polite, stately, and elegant firm; and perhaps most importantly, John McKinley had developed close personal relationships with some of its leading bankers. In fact, one Morgan partner and his wife had visited socially with the McKinleys in Tuscaloosa over the Christmas holiday; it was through this friend that McKinley first began to hear that Getty Oil might come into play for Texaco. But McKinley, not wanting to surrender Texaco’s decision-making to an advisor, delayed retaining Morgan Stanley until he had returned to White Plains and met with DeCrane late Wednesday afternoon. By then, it was too late. When a Texaco executive telephoned Morgan Stanley’s offices around dinnertime, he learned that the firm was no longer available—it had been retained by someone else. The Texaco executives assumed correctly that the “someone” referred to by one of Morgan’s senior merger partners during that telephone conversation was Chevron, which, McKinley had been told earlier in the day, was also preparing to make a bid for Getty Oil. The news reemphasized to McKinley and DeCrane that they were in a hotly competitive situation, one reminiscent of the Conoco deal. It also forced them to turn to the last major merger firm still available, First Boston Corporation, an investment house which, despite its name, was headquartered in Manhattan, and with which Texaco had no prior business relationship. More particularly, it pushed John McKinley and Al DeCrane into the eager arms of thirty-six year old Bruce Wasserstein, cohead of First Boston’s aggressive merger division, and a Wunderkind even amid the precocity of modern Wall Street.

  On the face of it, they were poorly matched. In background, personal style, and business philosophy, Wasserstein had little in common with the staid, disciplined leaders of Texaco’s corporate empire. Far from being a combat veteran or military academy graduate, he had worked for Ralph Nader during the 1960s and dabbled in journalism and antipoverty work. His suits were wrinkled, he was overweight, and he was unrestrainedly verbose. Raised in Brooklyn in an intellectual, prosperous, and socially ascendant Jewish family, Wasserstein was above all else a prodigy. He matriculated at the University of Michigan at age sixteen and entered Harvard Law School at nineteen. Four years later, he had obtained not only his law degree, but a master’s in business administration and a fellowship that allowed him to study economics at Cambridge University in England. After toying with less conventional careers, “Bruce the Moose,” as he had been affectionately nicknamed on the streets of Brooklyn, accepted a job as an associate attorney at Cravath, Swaine & Moore, perhaps the most powerful corporate law firm in Manhattan. Told that he would become a partner in just a few years, Wasserstein was assigned by the firm in 1976 to assist First Boston’s Joseph Perella, then head of the house’s M&A division, with a relatively small merger deal Suddenly, Wasserstein was in his element—deal-making. The pace of mergers, the gaming, the money, the sense of power and control—all of it appealed to Wasserstein. Perella, the son of an Italian immigrant who had been hired by First Boston’s Anglo-Saxon partners to bolster the firm’s fading reputation, saw in Wasserstein’s brilliance and innate aggression an important opportunity for his firm. He offered to double Wasserstein’s fifty-thousand-dollar salary at Cravath and give him immediate responsibility in the First Boston merger division. Wasserstein accepted. Within five years, he was cohead of the department with Perella and had lifted First Boston into the major leagues of the merger game.

  The attributes which led to Wasserstein and Perella’s stunning success were precisely the opposite of those cultivated on the executive floors of Texaco headquarters. The First Boston bankers were aggressive, unruly, creative, egotistical, and openly emotional. As one journalist described it, “Wasserstein realized that the ability to structure a deal, to coin a memorable phrase that defined a strategy, to exhibit an unshakable sense of self-confidence when you presented your plan to the board of directors—and an uninhibited zeal for self-promotion when you won—were far more important traits than the old-line investment bankers’ ability to cultivate a trim appearance and a comforting manner on the phone.” Wasserstein was not alone in this realization—Marty Siegel, Gordon Getty’s dashing retainer from Kidder, Peabody, was another prominent merger banker who relied on personality and self-promotion to win corporate clients—but Wasserstein extended the strategy to unprecedented lengths. Like Siegel, he made the blue-chip bankers at conservative houses such as Goldman, Sachs and Salomon Brothers uncomfortable. He lacked refinement. He seemed so interested in money.

  On the morning of Wednesday, January 4, Wasserstein was awakened in a Houston hotel room, where he was staying on a short business trip, by a telephone call from one of his partners in New York. His partner told him about the press release that had just come over the news wire declaring that Pennzo
il, Gordon Getty, the museum, and Getty Oil had reached “an agreement in principle.” Wasserstein had been tracking Getty Oil’s troubles for months, waiting for an opportunity to find a client and step into the fray. Now he realized that he would have to act quickly.

  Throughout the day, Perella and Wasserstein worked the phones—Perella in Manhattan, his partner in First Boston’s Houston office. They were searching not only for a client but for information. Wasserstein spoke twice to Marty Lipton, with whom he was friendly, and also with Larry Tisch. Six weeks earlier, when Tisch was named to the Getty Oil board, Wasserstein had taken the financier to lunch in Manhattan and pumped him for information about Getty’s problems. He had stayed in touch since then, monitoring the shifting negotiations.

  “Is there a deal here?” Wasserstein asked Tisch that Wednesday morning.