The Taking of Getty Oil

by Coll, Steve;

  “No, not yet.”

  “Well, what I don’t understand here is how the public is being treated.”

  “There are lots of things to be worked out here,” Tisch replied. “I don’t quite understand it, either.”

  “Listen, is there going to be a tender offer, a merger? What’s the form of it?”

  “Frankly, I don’t know if it’s worked out yet,” Tisch answered.

  “Let me ask you, if you don’t have a deal yet, if I came in with someone who was willing to offer more and include the public, is that something that you would listen to?” Wasserstein asked.

  “It all depends.”

  Wasserstein thanked Tisch and concluded their conversation. That was all the encouragement he needed. He swiftly began “chumming” for clients, eagerly telephoning executives at Mobil, Texaco, Phillips, and other oil companies, assuring them all that Getty Oil was there for the taking if only they would move quickly and aggressively. In Manhattan, Perella talked in rapid succession with investment bankers, arbitrageurs, stock analysts, and Wall Street lawyers, attempting in just a few hours to obtain a sophisticated understanding of the personalities and motives of Getty Oil’s key executives and stockholders. By early evening, Perella felt that he was reasonably well informed. When Texaco, spurned by Morgan Stanley, finally called to say that it would retain First Boston, Perella said that he would immediately send a “team” of bankers, analysts, and merger lawyers to White Plains for a briefing. It was essential, both Perella and Wasserstein emphasized, that Texaco be prepared to act within twenty-four hours. They urged McKinley to arrange a Texaco board of directors meeting for Thursday so that final authorization of a bid for Getty Oil could be granted before Pennzoil or some other suitor closed a deal.

  It was nearly 11 P.M. by the time Perella and his colleagues arrived at Texaco’s suburban headquarters. McKinley had gone home, leaving the matter in DeCrane’s hands. Wasserstein was on his way up from Houston, but it would be nearly dawn before his jet landed at tiny Westchester County Airport, just a few miles from the Texaco complex. Until Wasserstein arrived, Perella would have to take the lead for First Boston. Unlike Wasserstein, who described his mood in the midst of nerve-racking, frenetic takeovers in terms of Buddhist calm and serenity, Perella was a tense and moody man who did not wear pressure well. Once, in the middle of a late-night merger negotiation, Perella had been forced to leave a meeting in order to have his acupuncturist relieve an intolerable pain in his back. Still, Perella was confident, highly experienced, and well prepared to advise Texaco’s executives about their play for Getty Oil.

  They met in a large conference room on the top floor of Texaco’s squat, concrete building. It was in some aspects an awkward gathering, since none of the principals had ever met. DeCrane said later that he felt no tension between himself and the young, aggressive bankers who arrived from First Boston, but it was clear from the start that the advisors and the advised were operating under different assumptions. DeCrane was uncertain, for example, whether Perella understood Texaco’s longstanding policy that it would not participate in hostile takeovers. Of course, it was not immediately clear what relevancy that policy had in the present situation, since the parties at Getty Oil were virtually paralyzed by animosity. Given the recent history of Gordon Getty’s relations with Sid Petersen, was it possible for anyone to approach the company in a “friendly” manner? The question was never asked by DeCrane that night. In his view, First Boston was retained merely for its expert advice, not to formulate strategy. He assumed that First Boston knew about Texaco’s decision in the Conoco deal. As DeCrane saw it, the purpose of the eleven o’clock meeting with Perella was to review the information about Getty Oil gathered during the day by First Boston and to hear the recommendations of the experts. If First Boston had its own, aggressive ideas about how to attack Getty Oil and secure an agreement, fine, the firm was entitled to express its opinions. But Al DeCrane was not about to cede authority to mere retainers, especially ones with whom he had no prior experience. Advisors did not make decisions. That was not how things were done at Texaco.

  That Perella and his colleagues did not fully appreciate the peculiar corporate culture of their newfound client was evident from the beginning of their presentation to DeCrane and the handful of Texaco finance men gathered in the conference room that night. Perella began by laying out the situation, as it was presently understood by himself and Wasserstein, in the excited tones of a wartime mercenary. DeCrane said little. He sat at the table and recorded Perella’s points on his notepad.

  “Larry Tisch is the key board member, the key public shareholder,” Perella said. “Wasserstein has talked to Tisch and he was told that Tisch would look for a higher deal. Goldman, Sachs is mad and embarrassed. They claimed it wasn’t a fair value at $112.50. Goldman has not reported that price in a fairness letter. They’re embarrassed that the board has been willing to go further and actually negotiate at that price despite their unwillingness to give a fairness letter, and they’re mad at the museum for having said that it was prepared to go forward at that price.

  “The museum people felt that they were getting squeezed,” Perella continued. “As they saw it, there was an outstanding tender offer from Pennzoil that had the prospect of getting twenty percent of the shares. And if Pennzoil did that, they would then be able to join with Gordon, and that would put the museum in a squeezed minority position. The museum feels that it needs to act. Lipton told Wasserstein that he thought there were about twenty-four hours in which he was going to have to decide.

  “We have learned that Gordon has talked about a sale at $125 per share. Gordon is a buyer at a price and a seller at a price. Wasserstein or one of our other partners has a contact who says that Gordon has talked about where he is a buyer and where he is a seller, and that it depends on the price. There’s a can’t-miss price at which Gordon will be a seller. There are no signed documents. If you want to move, we’ll have to do it quickly.”

  Perella then ran down a list of possible competitors. Shell might be interested in some of Getty Oil’s properties, he said, but was not considered a serious competitor for purchase of the entire company. Chevron was a “definite yes”—they had retained an investment banker, probably Morgan Stanley, and had been shopping on Wall Street that day for a merger lawyer. Mobil was a factor, Perella continued, and Gulf and Phillips were “possibly” interested.

  “Well, you mentioned Mr. Getty,” DeCrane intervened. “What about the company? What’s their position?”

  “One of our analysts has talked to Petersen, and he is defeated in his hope to retain control of the company. He said that he would entertain a sale,” Perella answered.

  There was some discussion about Pennzoil’s option to buy 8 million Getty Oil shares at any time, an option that had been described in that morning’s press release.

  “That could be a way to take care of Liedtke,” Perella said.

  That is, it was predictable that the Pennzoil chairman would be upset if Texaco took Getty Oil away from him. By allowing Pennzoil to exercise its option to buy Getty Oil shares at the lower price of $112.50, Texaco could “take care” of Liedtke by letting him quickly sell those shares to Texaco at a higher price, clearing a handsome trading profit that would cover Pennzoil’s expenses and soothe the chairman’s ego. Perella also said, however, that the option was not enforceable until the deal with Getty Oil was final—and it was his view, of course, that the “agreement in principle” announced that morning was no agreement at all. Thus, as Perella saw it, if Texaco closed the deal and then wished to permit Liedtke to exercise his option, it would be simply buying Pennzoil off, not fulfilling any legal obligation.

  Perella went on to say that if there was a problem with the deal, it probably involved Gordon Getty. Perella said that there was a question about whether, and under what circumstances, Gordon was permitted to sell the 32 million shares held by his family trust. According to the original trust document, Perella said, the t
rustee could only sell to “avoid loss” to the trust.

  “So you might have to go the tender-offer route to merge him out or create concern that he will take a loss,” Perella said. “The problem is that there seems to be no way to get Gordon on base first.”

  Perella had driven to the heart of the matter, and what he meant was this: if Texaco wished to buy all of Getty Oil’s stock, it would have to outflank Gordon Getty. Gordon controlled 40 percent, the museum 12 percent, and the Getty Oil board 48 percent—the public’s shares. Since Gordon could only sell if he faced a loss, Texaco might well have to force him into that position. If Texaco made an agreement with the museum and the Getty Oil board first, it would have secured more than 50 percent of the company’s shares—enough to take control. It could then approach Gordon, explain that he was now in the minority, and threaten to squeeze him out at an unfavorable price if he did not agree to sell. Unquestionably, Gordon would then be facing a substantial loss. He would be legally permitted to sell. The problem, Perella implied, was that there was really no other way to go about it. If you approached Gordon first, if you tried to “get him on base,” and offered to buy his shares at some price above $120, he might be legally unable to sell even if he wished to do so because he would not be facing a loss. Of course, despite the declarations that there was a “can’t-miss” price at which Gordon would be willing to sell, neither Perella nor DeCrane nor anyone but Gordon knew whether, in fact, the Getty scion would be willing to surrender his joint bid with Pennzoil for control of the family company and sell his shares—at any price. Perhaps what Gordon wanted was not cash but power over Getty Oil. It was impossible for them to know. The advantage of Perella’s strategy, his plan to make a deal first with the museum and the directors and then force Gordon into a sale, was that it rendered Gordon’s ambitions moot, whatever they might be. Faced with the imminent prospect of a squeeze, Gordon would have no choice. He would have to sell. He would be the juice.

  Al DeCrane would later claim that this strategy was never embraced by himself or John McKinley because it violated Texaco’s policy of strictly avoiding unfriendly takeovers. To some, this claim by Texaco’s top executives was plausible. To others, it was not. What is certain is that Perella articulated the “squeeze” strategy during his nocturnal meeting with DeCrane, that DeCrane and another Texaco executive in the conference room wrote down Perella’s points, and that no one explained to Perella that his proposal violated the precepts of Texaco policy—they assumed Perella understood.

  Without contradiction from their client, it was only natural that Perella, and later his partner Wasserstein, would describe Texaco’s strategy options in the most direct, ruthless, and bloody terms. To begin with, such language reflected the flavor of their Wall Street culture. Moreover, First Boston’s reputation and success in the merger business had been built on such clear-eyed, unsentimental analysis. To the freewheeling Wasserstein, particularly, a takeover was not an exercise in formalism, like a game of chess or croquet. As a child, Wasserstein rewrote the rules of his family’s Monopoly game, passing out properties to the players before the dice were thrown, thus transforming the game into a test of gumption, strategy, and greed. It was the same for him now in the merger business. He and Perella lacked—or disdained—the refinement that would permit them to describe the amoral, even anarchic tactics of a takeover in language suitable for gentlemen.

  Around two-thirty in the morning, Al DeCrane went home. Before he left, he instructed his team of Texaco finance men to continue their evaluation of Getty Oil’s finances, based on publicly available documents and information supplied by First Boston, and to prepare for a meeting with himself and McKinley first thing in the morning. The Texaco directors were scheduled to convene for a special meeting at the White Plains headquarters building the next afternoon. If by then McKinley had reached a decision to go forward with a bid for Getty Oil, the directors would be asked to ratify his proposal at the board meeting. DeCrane told his finance men that McKinley would have to reach some conclusion in the morning, before the directors arrived.

  Thursday broke clear and cold in peaceful Westchester County. By seven they were all assembled in the conference room once more: Wasserstein, in from Houston, DeCrane, McKinley, and, of course, Perella and the finance men who had never left the Texaco compound. Wasserstein was introduced to his new clients. He reported that before their arrival he had telephoned Marty Lipton at his Manhattan apartment—Wasserstein had not awakened the attorney even at such an early hour, since Lipton had been up at three, reviewing Pennzoil’s draft of a final merger agreement—and that Wasserstein had confirmed that he was now working for a client, whose name he could not reveal, and that his client might have some interest in bidding for all of Getty Oil’s stock. Lipton had said that he would be available to discuss the matter later, when he reached his office. As he reported this conversation with the museum’s attorney to DeCrane and McKinley, Waserstein emphasized, as he had done at every opportunity during the past twenty-four hours, that time was of the essence. Lipton was under tremendous pressure. He might sign an agreement with Gordon and Pennzoil at any moment.

  For more than an hour, and with consultation from Wasserstein and Perella, McKinley and DeCrane reviewed the financial documents that had been prepared overnight by their subordinates. Using various assumptions about the amount of Texaco’s offer, ranging as high as $130 per share, they examined the price per barrel that Texaco would be paying for Getty Oil’s vast reserves. They talked about Getty’s nonoil subsidiaries such as ERC and ESPN and about how much they would fetch on the market; McKinley had no interest in perpetuating Sid Petersen’s diversification program and the Texaco chairman intended to quickly sell all of Getty Oil’s nonoil assets if he bought the company. At a wide range of prices, it looked like a sweet deal.

  What seemed to preoccupy John McKinley in the frantic hours before he met with his board of directors was not so much the financial advisability of acquiring Getty Oil—the deal was a good one for Texaco—but rather the willingness of the Getty Oil parties to receive his offer. So far, McKinley had involved himself only indirectly in the contacts with Lipton, Tisch, Petersen, and the others. He was relying on the representations of First Boston, which stood to make some $10 million if Texaco went ahead with its acquisition and less than $1 million if it didn’t. Naturally, Wasserstein and Perella were urging McKinley to go forward. It wasn’t that McKinley didn’t trust his new bankers; it was that he didn’t know them—he hadn’t played golf with them or taken them hunting in the Alabama wetlands. They did not belong to his clubs; they did not share his culture. And so in the hours before noon, when McKinley made his most critical decisions, the Texaco chairman seemed to rely in his own mind on assurances from men of his own rank, his own station in corporate life.

  A significant factor in his mind, for example, was the willingness of his friends at Morgan Stanley to represent Texaco in the deal on Wednesday, before the firm was hired by Chevron. Morgan Stanley understood Texaco, McKinley thought, and they wouldn’t have solicited the company if the deal was improper. Similarly, McKinley was comforted by assurances from Marty Lipton and Larry Tisch (he had worked with Lipton in the past) who said that everyone involved, with the probable exception of Hugh Liedtke, would welcome rescue from a white knight. But McKinley did not call Gordon Getty himself. For an assessment of Gordon’s willingness to sell, the Texaco chairman relied on Larry Tisch, who had been nominated to the Getty Oil board by Gordon but who had spoken against his sponsor at the marathon directors meeting earlier in the week.

  Just before noon, McKinley telephoned Marty Lipton directly. He told the attorney that Texaco was the client Bruce Wasserstein had been hinting about all morning.

  “We are about to have a directors meeting,” McKinley said. “I am going to recommend to my board that we make a specific proposal regarding the acquisition of Getty Oil at a price materially higher than the current Pennzoil proposal. I don’t know how long our meet
ing will run. We want to make sure that before you sign an agreement, you’re aware of what our proposal is. If necessary, we’ll abbreviate the meeting to the degree we can, but we do want to make this proposal to you. And in any event, we will be in touch with you by late this afternoon. If it is necessary, we are willing to communicate earlier.”

  Lipton replied that he would listen to Texaco’s offer before he signed any final documents with Pennzoil and Gordon. He reiterated that the deal was still open, that Texaco was welcome to bid. As much as anything else, Lipton’s assurances persuaded McKinley that the offer he was contemplating was proper. Marty Lipton, after all, had done much to invent the field of modern merger law. He was the father of the poison pill, consultant to the Securities and Exchange Commission, author of congressional legislation, the man of a thousand mergers. If Lipton said the deal was proper, then surely it was. Sid Petersen said so. Larry Tisch said so. John Weinberg, McKinley’s golfing partner at Goldman, Sachs, said so. All of Texaco’s own lawyers said so, including Morris Kramer, a partner of Joe Flom and a well-known merger specialist.

  John McKinley decided to go forward.

  The meeting with his board of directors that afternoon was largely uneventful. The Texaco finance men presented a number of hastily prepared charts and graphs. The directors, who included such corporate luminaries as retired IBM chairman Frank Cary and Capital Cities chairman Thomas Murphy, asked questions about debt levels, financing, the impact of fluctuating interest rates and oil prices, the amount of oil being acquired and at what price, possible antitrust and international trade considerations, and so on. At one point, Texaco’s general counsel, William Weitzel, told the board that Texaco had been approached by Goldman, Sachs and others who said that Getty Oil was looking for offers. Weitzel said that all of the information in his possession suggested the matter of Getty Oil’s future was still open. Morris Kramer, a senior partner with Skadden, Arps, the Wall Street law firm, confirmed Weitzel’s assessment. Based on Wasserstein’s recommendation, McKinley asked his directors for authority to make an offer up to $125 for all of Getty Oil’s shares—a total of more than $9 billion, which would make the deal the biggest corporate merger on record. At ten minutes before five in the afternoon, the directors voted unanimously to authorize McKinley’s proposal.