by Coll, Steve;
Pickens might be an opportunist, but he was also a brilliant, articulate oilman, and the critique he proffered of large, publicly held oil companies such as Getty was persuasive. The domestic oil industry, Pickens said, was already in a state of liquidation; corporate raiders such as himself were only accelerating an inexorable trend. For more than ten years, the largest American oil companies had been unable to replace their domestic reserves as fast as they produced and sold them. That meant the companies were living on borrowed time—eventually, their reserves would run out and there would be no oil in the United States to replace them. American soil had been thoroughly picked over for oil; no major field had been discovered since Prudhoe Bay, in Alaska, back in the 1960s, and there was no reason to believe that any major discoveries were left to be made. For decades, the only large fields found were under the ocean, in the Gulf of Mexico and off the coasts of Alaska and California. Such oil was difficult and expensive to drill and produce, and besides, even the ocean floors surrounding the United States were by now pretty well explored.
The inability of giant oil companies such as Getty to replace their domestic reserves had important political and national security implications. More and more, the oil companies relied on reserves in politically volatile areas overseas, often in countries whose governments were hostile to American foreign policy. The failure of the big oil companies to anticipate the nationalization of foreign-owned oil properties in Arab countries during the early 1970s, for example, had led to profound industrial shocks in the West when the OPEC nations organized an embargo in 1973. By 1982, it was widely appreciated that the United States was dangerously dependent on imported oil because its own reserves were running dry. Some government officials felt that hostile takeover raids in the oil industry such as those masterminded by Boone Pickens only exacerbated an already serious problem. But Pickens was a capitalist, not a statesman, and to him the national security concerns expressed by oil executives were a canard. Those men were worried about their salaries and perquisites, not the future of the United States, he said. To Pickens and his intellectual brethren on Wall Street—particularly a prominent oil analyst named Kurt Wulff and the aggressive, protakeover investment bankers at Drexel Burnham Lambert Inc.—the important aspects of declining American oil reserves were financial, not political. Pickens argued, not illogically, that it was capitalism which had made America an industrial power in the first place, and it was capitalism which would save it from the oil crisis. Let the free market rule, he declared.
From Pickens’ vantage, the depressed stock prices of companies such as Getty Oil in 1982 were easy enough to explain. In sum, the problem was bad management. The job of an oil executive such as Sid Petersen was to serve his stockholders, his owners, not to pontificate about national security. And Petersen and his like in the executive suites of the country’s largest oil companies had done their jobs poorly, Pickens believed. During the late 1970s, when deregulation and the Arab cartel drove world oil prices nearly through the roof, companies such as Getty Oil were the happy recipients of billions of dollars in windfall profits. For Sid Petersen and other oil executives, the question then had been, what should we do with all the money?
There were several choices. They could hand the money directly over to their stockholders as a kind of bonus. They could plow it back into the oil business, exploring for new reserves to replace the ones currently depleting. Or, they could diversify out of the oil business altogether. The conventional wisdom in the industry was that the oil business was finite—sometime in the twenty-first century, the world would run out of oil. By then, it was hoped, the West would have shifted its dependence on oil to other, preferably renewable sources of energy. Consumption of oil was already declining because of higher prices. Shouldn’t the oil giants use their cash windfall to prepare for the future? it was asked. Shouldn’t the companies protect their stockholders by investing in new industries, ones that would be still be viable thirty or forty years from now?
The other alternatives—plowing the windfall back into the oil business or giving it directly to stockholders—seemed short-sighted if one accepted the premise that the oil industry would soon go the way of the dinosaurs. For one thing, with all the billions in cash the oil companies suddenly possessed, it was simply impossible to use that money prudently to explore for new fields of oil. Companies such as Getty devised their oil and gas exploration projects on the basis of strict “rate of return” formulas. That is, the companies tried to balance their exploration spending between projects that were certain to succeed and those that were more risky. The safer projects yielded less profits but were more likely to turn up oil; the riskier ones promised big payoffs but also potentially large losses. The problem was that there were many more risky exploration projects available for funding than safe ones. If the companies simply threw their newfound billions into exploration, they would have to spend a disproportionate amount on high-risk projects. If those projects failed, they would have blown the bundle on the most expensive dry wells in history. The other choice, that of distributing the money directly to shareholders, seemed irresponsible to oil executives such as Petersen. They had to think about the future of the company, they said. If they indulged stockholders now, what would be left of the company in twenty years?
To that intriguing question, Boone Pickens and his allies answered: “Nothing, perhaps, and that’s fine with us. Give us the cash. If we want to invest in high tech or insurance or entertainment, we’ll buy stock in companies that specialize in those businesses.” Pickens’ argument was disarmingly simple. If one accepted that the domestic oil industry was doomed, then why not give stockholders the benefit of a liquidation sale? Why not let them profit directly from rising oil prices? While higher prices partly ensued from international politics, they were also, in part, the natural result of a declining world oil supply. As supply declined, price went up. Why not pass the profits along before there was no oil left? Stockholders such as Gordon Getty owned companies such as Getty Oil, Pickens said. Executives like Sid Petersen served at the stockholders’ pleasure; they had no absolute or divine right to their companies.
But the large oil companies defied their critics in the late 1970s. They chose to diversify out of the oil industry. Mobil bought Montgomery Ward. Exxon acquired Reliance Electric and tried to move into the office products business, in competition with IBM and Xerox. And Getty Oil, under the impetus of Sid Petersen, bought—in friendly deals, not hostile takeovers—ERC and ESPN. It was exciting for executives such as Petersen to be involved in a diversification program. It moved them out of the oil patch, onto the front pages of the financial press, and finally into heady new worlds of technology, electronics, finance, and entertainment. At Getty Oil, for example, the acquisition of the cable sports network ESPN had been sponsored by an executive named Stuart Evey, who had built his reputation in the company through his personal friendship with George Getty.
Evey was the ultimate embodiment of the “new” Getty Oil; he had the spirit of Hollywood in his bones. Evey was a fixer, a facilitator. He maintained a box at the beautiful Santa Anita Racetrack and parceled out passes to those Getty Oil executives currently in his favor. He also had season tickets to Dodger Stadium. For years, Evey and his wife had been close to Sid and Nancy Petersen, and Evey had supported Petersen’s rise to chairman at the expense of the muddy-boots oilmen in corporate headquarters. Evey had never worked in the oil patch; he supervised Getty Oil’s real-estate holdings and at one point ran a company-owned hotel in Acapulco, Mexico. He was a tanned, handsome man who wore his shirts unbuttoned to expose the gold chains around his neck. He knew actors and actresses by their first names, and he fancied himself something of an entertainment mogul. Through his personal connections, he brought ESPN to Petersen’s attention and helped shepherd the acquisition through Getty Oil’s board of directors.
By 1982, however, when Gordon Getty traveled to Wall Street, it was clear that the exhilarating, ambitious diversificat
ion programs embarked upon by oil executives such as Sid Petersen—programs to save their companies in the face of declining reserves—had failed. Actually, Getty Oil did better than some. Exxon’s foray into office products was an unmitigated disaster, and the company lost hundreds of millions of dollars before finally bailing out. Mobil had only marginally better luck in the department-store business. For Getty Oil, ESPN was a similar albatross around the company’s neck, losing tens of millions each year without any near prospect of a turnaround. ERC, however, proved a sounder investment, though company critics argued nonetheless that it represented an unnecessary diversion of cash and resources. After all, oil was still the company’s primary business, and Getty Oil’s reserves continued to drain away without any discernible benefit to shareholders; ERC’s profits were not nearly enough to make up the difference in the long term or even the short term.
When Gordon Getty visited Wall Street in September 1982, he heard both sides of the debate over the oil industry’s recent past and uncertain future. To him, the case sponsored by Boone Pickens and his aggressive, takeover-minded allies made the most sense because it explained the poor recent performance of Getty Oil stock, as evidenced by the failure of management to properly invest the late 1970s windfall, and laid the blame at the feet of Sid Petersen, whom Gordon doubted for his own reasons. Actually, Petersen was not as hostile to the Pickens movement as some other executives of large oil companies. He, too, was distressed by Getty Oil’s value gap and the company’s foundering stock price. He was distressed above all because the value gap meant that Getty Oil was a prime takeover target for Pickens or some other like-minded corporate raider.
What Petersen appreciated better than Gordon Getty did, however, was that the debate on Wall Street and in corporate boardrooms over the oil industry’s past errors and future policies had two distinct aspects. On the one hand, there was sometimes a scholarly, academic atmosphere about it all, a sense among industry analysts of reasonable men disagreeing over complex business issues. In that context, Petersen was willing to examine the Pickens “theory” of the oil business, and even, after thorough study, to implement its principles at Getty Oil if it would benefit stockholders. The problem was that Boone Pickens was not a university professor, and neither were the financiers, investment bankers, and oil men who had adopted his views and strategies. They were tough, bloodied, ruthless businesmen out to profit from the value gap in the oil industry. They might sound like intellectuals, like well-spoken dissenters who had taken a fresh look at a fraternal, in-bred industry and then seized upon some innovative solutions—but the record did not support such a view, Petersen believed. Boone Pickens was after one thing: money. Pickens always said that what he wanted was to run a big oil company and to operate it for the benefit not of management, but of its owners, the stockholders. But when push came to shove in a takeover fight, he was willing to take the money and run. “Greenmail,” they called it, and the nefarious tone was appropriate enough. Pickens or Sid Bass or some other raider would accumulate stock in a company, announce a takeover attempt, and then quickly reach a special “settlement” with management that involved the target company buying the raider’s stock at a premium over the market price, enough to make the raider tens of millions of dollars in instant profits.
The point was, Petersen thought, that for all the nicely dressed arguments about diversification and exploration and liquidation, the oil industry was just as wild, ruthless, and dangerous as it had been at the gushing Spindletop well in Texas eighty years before. Gordon Getty, the self-styled absent-minded professor, was attracted to the intellectual aspects of Wall Street’s critique, but Petersen believed he failed to appreciate that those arguments disguised some very ungentlemanly intentions. For example, the wisdom among merger experts on the Street offered that when a raider approached an executive “just to talk” about a value gap or a possible takeover offer against the executive’s company, any answer from the executive short of “Fuck you, get out of my office” was an indication that he might be willing to entertain a bid by the raider. That was because executives in such situations had diverse loyalties and could not appear to be too friendly to the raider even if they wished to receive a takeover offer. Not only had Gordon Getty failed to say “Fuck you” during his visit to Wall Street, he had actually told them all, “Come see me sometime.”
And they had taken him at his word. Almost as soon as Gordon returned to San Francisco, a secret plan to take control of Getty Oil was set in motion by Corbin Robertson, Jr., head of Texas-based Quintana Petroleum. Robertson was the front man for the conservative, sober, private, and immensely rich Cullen family, which had billions in cash at its disposal. It was hard to know exactly how large the Cullen fortune was, since none of the family companies, including Quintana, was publicly owned and thus subject to federal disclosure requirements. But since the family wealth was the legacy of oil tycoon Hugh Roy Cullen, who was considered one of the world’s richest men during the 1950s, the fortune was no doubt formidable. Quintana Petroleum was the largest of several closely held family companies. Its chief executive was Robertson, who had married into the Cullen family. As such, he was the man who negotiated its deals and often represented the family, when necessary, in political and social forums. Through contacts in New York, he had heard about Gordon’s curious meetings on Wall Street. Days later, Robertson contacted Gordon in San Francisco. He told him that he shared Gordon’s befuddlement over Getty Oil’s depressed stock price, and said that he had a plan to correct the situation. Without consulting Petersen, Gordon agreed to a meeting.
There was later some dispute over who knew what and when about the Cullen family’s plans, but it may well have been that Sid Petersen learned about Gordon’s intention to meet with Robertson before Gordon’s own lawyers did. One day early in October, Petersen received a call from Chauncey Medberry III, retired chairman of behemoth Bank of America and long a member of the Getty Oil board of directors. Now approaching seventy, Medberry had always been one of Petersen’s most enthusiastic supporters.
“I just got a call from a banker friend of mine down in Texas,” Medberry said. “He wanted to know if I could arrange a meeting or set up a telephone call or something between Corby Robertson and Gordon. I wanted to know how you think I should handle it.”
Petersen was stunned; he knew that Robertson and the Cullens were both rich and aggressive. “They’re going to get to Gordon one way or the other,” Petersen sighed. “You might as well be the vehicle.”
With Medberry’s assistance, then, Corby Robertson flew to San Francisco on Thursday, October 14. To demonstrate to Gordon that he was serious about his takeover proposal, the Quintana chief brought along John McGullicuddy, chairman and chief executive of Manufacturers Hanover Trust, one of the nation’s largest banks. Manny Hanny, as the bank was known in financial circles, was there to persuade Gordon that Robertson had billions at the ready if Gordon was willing to make a deal.
That day at the Broadway mansion, Gordon was presented with a document typed on plain paper entitled “Confidential Presentation.” Lest it fall into the wrong hands, the proposal made no specific mention of Getty Oil, referring instead to “Old Company” and “New Company.” Gordon was referred to as “Stockholder I” and the J. Paul Getty Museum, with its 12 percent holding in Getty Oil, as “Stockholder II.” The Cullen family was described in the document as “an investor group.”
“Stockholder I and an investor group will each form a partnership and enter into a joint venture arrangement to take Old Company private by buying out Stockholder II and then the public for cash. Old Company will be then liquidated to flow oil and gas reserves directly to the partners. A management company will hire existing employees and manage assets under the existing organization structure,” the proposal said. On page 2, under a heading labeled “B. Bottom Line,” the document said simply, “Everybody wins!”
Everybody, perhaps, but Sid Petersen. In fact, it was not clear at this stage wh
at price the Cullens would be willing to pay for Getty Oil—that was a “detail” to be worked out later if Gordon wished to go forward. Under Robertson’s plan, Gordon would not take control of the company; he would likely have less influence over its operations than he did presently. Robertson and the Cullens would control 60 percent of the new, privately held Getty Oil. The advantage for Gordon, Robertson argued at the Thursday meeting, was that instead of owning stock in a publicly traded company, the Sarah Getty Trust would have direct ownership, through a partnership arrangement, of the profits from 40 percent of Getty’s oil fields. Gordon and the trust would put up no cash—that would all come from Robertson and Manufacturers Hanover.
“If you’re satisfied with the general concept, then we’ll proceed with further investigations,” Robertson told Gordon. “We’ll formulate a business plan, a management plan, and look into the legal, tax, and government implications. Then we’ll hire the investment bankers and determine a price for the public stockholders and the museum. The timing and sequence of events are essential. The security of information is a top priority. We can inform only those who need to know.”
It was not until after that Thursday meeting with Robertson that Gordon decided his own lawyers at the Lasky firm had a need to know; Gordon had met with Robertson without legal counsel present. It may actually have been Petersen who first told Lasky about Gordon’s flirtation with the Cullens—the Getty Oil chairman called Lasky soon after he heard from Medberry and asked the lawyer what Gordon was doing. Petersen had now also learned from a friend in the investment business that Manny Hanny had a $8 billion line of credit arranged should a takeover campaign be launched by Gordon and the Cullens. In any event, it was not until a week after Gordon’s meeting with Robertson, on Thursday, October 21, that Petersen, Lasky, and Gordon finally talked directly about Quintana’s takeover proposal.
