The Taking of Getty Oil

by Coll, Steve;

  Petersen did not argue. It was clear that Gordon’s sudden alliance with the museum was more than just another of his vague, casual suggestions. An LBO was really a takeover. Gordon said later that he had not firmly decided that July afternoon whether Sid Petersen would stay or go if and when he controlled all of Getty Oil Company, but Petersen himself believed that he had no real future in a company run by Gordon. As he listened to Gordon, he was in a mild state of shock. He had heard of leveraged buy-outs before, but frankly, he said later, he didn’t know what the hell a fence was.

  His ignorance lasted only briefly, but the irony of that moment in his office lingered for years. Sid Petersen, the finance man, the chief executive who had risen to the top because of his savvy with numbers and budgets and financial strategy, was about to lose his $6 billion oil company in a takeover deal he didn’t even understand.

  * Tim Cohler said in an interview three years later that his recollection of this conversation was “very clear and strong.” In the course of a lawsuit, he produced contemporaneous, handwritten notes which support his recollection. Sid Petersen, however, said in an interview that he does not recall the conversation described by Cohler at all. The conversation may have occurred, Petersen said, but he does not remember it. Petersen said that he was suspicious of Williams and thus it was unlikely he would have allowed the confidential Goldman studies to be disclosed to the museum president.

  10

  Golden Handcuffs

  When they later tried to describe the shift in mood at Getty Oil headquarters in the days following the July 8 board meeting, the lawyers, executives, and bankers involved said things like “We moved into deal mode” or “Now we knew the game was afoot.” In some ways, it was a game—a deadly serious, very expensive one. At times, though, it seemed as if there were two games going on at once, and two categories of players. One category included Sidney Petersen, Gordon Getty, Dave Copley, and the other high-ranking Getty Oil career men who were involved in the strategies and intrigue that summer. For them, the game was Life. It was their careers, or their money, or their families at stake. Whether they won or lost, they were never going to play again. Surrounding these central actors, however, was a rather different group of players: the advisors. For them, the battle for control of Getty Oil was more like playing Monopoly with someone else’s money. Yes, they were under personal stress themselves, and yes, they felt a genuine, empathetic loyalty to their clients, but theirs was a fundamentally different situation. If Bart Winokur, for example, lost Sid Petersen and Getty Oil as clients because of a takeover, it might set him down a notch at Dechert Price & Rhoads, but it would hardly change his life. There were other clients, other deals for him. Indeed, his career might acquire a certain panache for having brushed against so large a corporate happening, even if he ended on the losing side. He would then have sailed the big ocean and seen the big whale, even if his ship and captain were lost along the way.

  It was in July that the advisors, the Monopoly players, began to dictate the flow of the action. It really started that moment in Sid Petersen’s office when Gordon mentioned the fence. What was a fence? Petersen had wondered. The Goldman, Sachs investment bankers would know; they built fences all the time. They had to be mobilized now; they had to explain what Gordon might do. More fundamentally, the idea of a leveraged buy-out shattered the fragile facade of unity at Getty Oil. It was no longer plausible to pretend that Sid Petersen and Gordon Getty had the same basic long-term interests at the company. In an LBO, with or without a fence, Gordon would buy the 40 million shares of Getty Oil stock owned by the public. It was Petersen’s responsibility, as a matter of both law and principle, to protect the interests of his shareholders. For the first time, he and Gordon were indisputably on opposite sides.

  Also for the first time, a potential takeover of the company was imminent. While the board met that Friday at Getty Oil headquarters, Cohler and Woodhouse had spent several hours talking with the museum’s Harold Williams about a joint bid with Gordon for ownership and control.

  “This is not a 13D group,” Cohler had joked at the start of that meeting in Century City, referring to the SEC rule which required anyone who owned 5 percent of a company’s stock and was launching a takeover to disclose publicly his intentions toward the company. They had laughed loudly at that remark because Williams, the former SEC chairman, presumably knew that they each had to be careful about what they said and how they said it. Otherwise, they could be accused of misleading Getty Oil’s public shareowners.

  “Gordon told us that on the basis of a conversation he had with you last month, he thought the museum might not necessarily want to sell its shares in any possible deal or restructuring,” Cohler told Williams. “If Gordon was right, if you might be willing to consider staying in during a deal, then it probably would make sense for you and Gordon to get together and talk.”

  Cohler mentioned the LBO with a fence and Williams responded favorably. It was definitely an idea that should be considered and investigated, Williams said, and he complimented Gordon’s creativity. Williams might be a threatening enigma to Sid Petersen, but to Gordon and his lawyers there was no mystery about him. He might be soft-spoken, almost sleepy, but he was clearly possessed of unusually sharp intelligence. After all, he had graduated Phi Beta Kappa from college at age eighteen and completed Harvard Law School by twenty-one. He was also independently wealthy; before he was forty, Williams had been named chairman of the $2 billion Norton Simon conglomerate, and he had made a fortune in the job. During his tenure at the SEC, he lived in a $750,000 home in fashionable Georgetown amid opulence unusual for a Washington official. He was a man, then, who shared a certain wealth and experience, as well as a fondness for fine art and classical music, with Gordon Getty. He might be just the partner Gordon needed. Like Petersen, Williams was qualified to manage Getty Oil day-to-day, but unlike Petersen, he seemed to have no qualms about working closely with Gordon.

  At the conclusion of their Friday session, Cohler and Woodhouse arranged a meeting for the next morning between Williams and Gordon. They met in Gordon’s room at the Beverly Wilshire Hotel for several hours. Gordon told Williams that if they did agree to make a bid for Getty Oil together, he didn’t care how the titles were dispensed once they gained control. Gordon made it clear that he thought Williams had the necessary experience to run the company if he wished, but that Williams should also feel free to bring in some new outsider to be chief executive. In sharp contrast to Gordon’s dealings with Sid Petersen, the mood that Saturday morning was relaxed, easy, almost brotherly. There were still some very important questions to be answered—whether the fence was economically feasible, whether the money could be borrowed, how their legal responsibilities as museum trustees came into play if they joined forces—but the feeling at the end of the meeting was that they should definitely go forward. The first step, they both agreed, was to have Goldman, Sachs perform a detailed study of their LBO proposal to determine if it was economically viable—that is, whether 48 percent of Getty Oil’s assets could be used to finance the purchase of 48 percent of the company’s stock. Petersen had not objected to such a study during his short encounter with Gordon after the Friday board meeting. Cohler said he would talk to Winokur and Copley, too, and make certain that Goldman understood precisely what it was that Gordon wanted the firm to study.

  “I think the board of directors might be of the view that Goldman has made enough studies,” Winokur objected when Cohler spoke with him.

  “Well, that’s because they didn’t know anything about this. Look, it’s up to Sid to decide what he wants to do with it,” Cohler said. The implication was clear: the company could continue to cooperate with Gordon, or it could force him to take action on his own.

  “Well, we’ll talk to Sid,” Winokur answered.

  When he did, Winokur found Petersen disheartened. The chairman had thought at the board meeting that the studies were finally behind him. Now there was yet another. Moreover, it seeme
d to him—and this was a depressing realization—that Gordon now had no doubt in his own mind that Petersen would do whatever he was told. That perception had to be changed, Petersen thought. But the chairman decided over the weekend, as he had in similar situations all during the past year, that this was not the time to provoke Gordon Getty. Petersen was just beginning, in the aftermath of the Friday meeting with Gordon in his office, to organize a special team of takeover advisors. Until that team was in place, it would be useless to challenge Gordon openly. Besides, with Seth Hufstedler now on board, the secret plan to sue Gordon over his trusteeship seemed more promising than ever. So Petersen relayed a message to Cohler that Goldman could proceed as requested and study the viability of an LBO takeover with a fence.

  Geoff Boisi was dispatched by Goldman, Sachs to assist Bart Winokur with the LBO study and the negotiations with Gordon. Boisi’s entrance marked a major shift in strategy by Goldman and Getty Oil; it meant the game was indeed now afoot. For the past six months, Petersen had been working with partners and associates in Goldman’s corporate analysis department, the side of the firm that crunched numbers and evaluated long-term corporate planning strategies for its blue-chip clients. Boisi was the chief of a very different department at Goldman: mergers and acquisitions, or M&A, as Wall Street’s shorthand described it. The partners in M&A were not planners, they were deal-makers. They were the central players in—some said the cause of—the merger mania sweeping American industry in the early 1980s. They were the brokers of the country’s largest corporations. Their jobs involved not simply buying and selling companies, however. Their role was more akin to a general’s wartime headquarters staff: they devised tactics, mapped out strategies, and devoted themselves entirely to the goal of victory. There was no rest for an M&A partner like Geoff Boisi; he was always on alert, jetting from city to city as the battles shifted, sometimes advising four or five clients at the same time. A banker like Boisi, who was at the top of his profession, the head of M&A at one of the most important investment banking firms, was drawn to takeovers where there was the most at stake. This was not only because the big deals were most exciting; they were also the most lucrative.

  M&A advisors routinely contracted for a small, flat retainer fee plus a percentage of any future transaction involving their client. The bigger the client, then, the more expensive was the transaction and the higher was Boisi’s potential fee. That July, Getty Oil looked like it might end up in one of the biggest deals of all time. The company was so large and so rich that even a 48 percent LBO takeover would generate millions in banking fees. There were those, including Gordon Getty himself, who questioned the fee structure prevalant in the merger area of investment banking. These critics wondered whether bankers like Geoff Boisi weren’t driven to cause any deal to happen, regardless of its merit or consequences, because that was the central incentive in their fee arrangements. Certainly, it seemed to be a problem some of the time, especially in deals where the bankers themselves instigated a hostile takeover. But that was not the situation at Getty Oil in July. It was Gordon who threatened to put the company in play, and Goldman, in keeping with its policy, was manning the defense on management’s behalf. Also, while Boisi himself was considered to be a rising star on Wall Street, he was not regarded as one of the most aggressive M&A bankers, comparable, say, to the fast-talking Bruce Wasserstein at First Boston or the highly visible Martin Siegel at Kidder, Peabody & Company, bankers who seemed to thrive in the most hostile and bitter takeover deals.

  Rather, Goldman, Sachs’ conservative reputation and Boisi’s own temperament led him to cultivate a lower profile. He was a tall, bony, tense man with long fingers that often rested against his cheek, gripping it nervously. His hair was coal black, his shoulders high and broad, and large ears protruded from the sides of his head. Like many of the bankers in his field, he was very young, in his mid-thirties, and the pressure of work had not yet aged his boyish face. There was an air of serious intelligence and concentration about him. He was not a playboy, like many of his colleagues, or a connoisseur of fast cars and exotic travel. He was a family man, and when he was home, he commuted between Wall Street and Long Island by train. He had grown up in New York, attended Boston College and then the University of Pennsylvania’s Wharton School of business and finance. He was a vice-president at Goldman, Sachs before he was thirty and a partner three years later. By 1979, barely into his thirties, he was running the firm’s M&A department and was earning more than a million dollars per year in salary and bonuses.

  In the weeks ahead, Boisi and attorney Bart Winokur would become fast allies in the affairs of Getty Oil Company. They were two of a kind—young, Ivy League-smart, wealthy and successful way beyond their years, and privy to the most stimulating intrigues of American finance. They shared a certain distance from the experiences of a lifelong company man like Sidney Petersen, a man who had grown up setting back speedometers at his father’s tiny auto repair shop, but they also shared a fierce competitiveness and loyalty to their client. There were those at Getty Oil who regarded Winokur and Boisi as too smart, too sharp, too much taken with themselves; but whether such resentments were born of class and social differences or reflected actual experience was hard to tell. In some respects, Boisi and Winokur were men apart at Getty Oil that July. Yet, in the management cabal that included Petersen and Copley, they wielded extraordinary power.

  On Gordon’s side, too, the advisors were becoming more important. For part of every summer, Gordon and Ann vacated their Broadway mansion and flew to Europe to travel and attend a series of classical music festivals, particularly the Vienna Festival, where the emphasis is on opera. In the Gettys’ absence, Cohler and Woodhouse found that they had to take more responsibility for their client’s dealings with Getty Oil. Gordon had left the country enthusiastic about an LBO takeover with Harold Williams, but there was much still to be done; it wasn’t clear, for one thing, whether Petersen would ever support the idea. After all, in all likelihood, the takeover would result in the loss of his job.

  The new focus on Williams, the museum, and Getty Oil meant the Lasky firm, which had been largely excluded from the dealings with Pickens (who following his rebuff by Petersen was now turning his attention to a raid on Gulf Oil) and Corby Robertson and the Cullens (whom Gordon continued to string along in his casual sort of way), was again at center stage. Cohler was the point man, since Lasky himself, nearing eighty years of age, did not relish the constant travel between San Francisco and Los Angeles and was busy with other cases. Woodhouse, while technically Cohler’s equal, did not share his partner’s penchant for deal-making or his aggressive, articulate personality. That July, in fact, some of the executives at Getty Oil headquarters began to describe Tim Cohler as a “mini Lansing Hays” because of his increasingly prominent and forceful representation of Gordon Getty. He was a litigator by training and nature, and he began to display a tough, swaggering posture in negotiations with Winokur and Boisi. He seemed to cultivate the aura of a hard-boiled California detective drawn from the novels of Raymond Chandler and Dashiell Hammett. He was a bit like Sam Spade, attorney at law. His face was sallow and unexpressive, his hair closely cropped, and he smoked unfiltered Camel cigarettes. When he took one from the pack, he liked to tap it meaningfully on the face of his gold watch, compressing the tobacco. Then, with flair, he struck a wooden match and lit the end, exhaling billows of smoke through his nose. He was a Harvard Law graduate, but he had lived in California for more than a decade, and he lacked the manners of Eastern privilege exuded by Winokur and Boisi.

  For several weeks, beginning with a day-long meeting at Getty Oil headquarters on Wednesday, July 20, Cohler, Winokur, and Boisi began to feel each other out. They knew a takeover match was on now, and each had to take the other’s measure. Cohler had flown down to Los Angeles expecting that Goldman, Sachs would present to him the full, detailed results of their LBO study—with all the data Goldman had assembled for the earlier studies, it would only have taken
the firm days to analyze an LBO. But when Cohler arrived at the conference room on the eighteenth floor, there were no books, charts, or slides. There was only Winokur and Boisi and two of Getty Oil’s in-house finance men. Cohler had never met Boisi before, but he understood the implications of the M&A partner’s presence. Getty Oil was readying for a fight.

  “There is no way an LBO takeover with a fence will fly,” Winokur announced flatly as soon as they were seated. “It’s just not even close—there’s no way to do it.” Gordon’s proposal was something bankers referred to as a “100 percent leveraged transaction.” In other words, since 48 percent of the company’s stock was being financed by 48 percent of its assets, there was no room for error. If Gordon and the museum wanted to buy out the public stockholders, they would have to pay a fair price. Although Goldman had not yet done a formal study, the firm would conclude in just a few weeks that $120 per share was the minimum fair price for the public shares. The actual value of Getty Oil’s assets was estimated by Goldman to be between $120 and $150 per share. A banker financing a fenced buy-out, then, would have to lend $120 cash based on collateral assets worth roughly the same amount. Bankers rarely made that kind of loan under any circumstances. For example, a homeowner whose equity in a house was worth $100,000 on the open market could not borrow the full $100,000 from a bank, using the house as collateral. The bank insisted on a cushion. It might lend $50,000, or even $75,000, but it would not loan the full amount. On a much larger scale, that was the problem Gordon faced with his proposal for a leveraged buy-out with a fence.

  Cohler was surprised by Winokur’s sudden pronouncement that the deal could not work, but he accepted the conclusion—Goldman, Sachs, after all, was a reputable firm. Later Cohler discovered that Winokur was correct. The debt required to buy out the public stockholders without touching the assets behind Gordon’s “fence” was too great. Without a fence, that is, using all the company’s assets to finance the purchase of 48 percent of the stock, a buy-out might work. Even then, it would be risky for both the banks and the buyer. Cohler made it clear that Gordon was not interested in an LBO without a fence. If he did that, he would be using his family trust’s assets as collateral—assuming the risk of the purchase. And with a fence in place to protect the family trust, the deal was untouchable.