The Taking of Getty Oil

by Coll, Steve;

  Glanville said that he would discuss the proposal with Liedtke over breakfast. He did not sound optimistic.

  Geoff Boisi now decided to place a few more telephone calls. The night before, during the confused caucuses at the Inter-Continental Hotel, Boisi had talked with Sid Petersen about whether it was possible to quickly find a third-party buyer for Getty Oil, without the formal ninety-day auction sought by Petersen. The Getty Oil chairman had encouraged Boisi to see what he could do. Directors such as Henry Wendt, Chauncey Medberry, and even Larry Tisch had argued repeatedly during the board meeting that the company could fetch an offer above $120 if only it had time to hold a formal auction. Boisi felt that even without an auction he might be able to quickly find a buyer, a “white knight” willing to step in and pluck Getty Oil from the outstretched arms of Gordon Getty and Hugh Liedtke. It was the business of a merger banker like Boisi to pull off such a coup, even under tremendous time pressure. It was a chance for him to hit a home run.

  So after speaking to Glanville early that Tuesday morning, Boisi met with John Weinberg, Goldman, Sachs’ cochairman. Weinberg, Boisi knew, played golf occasionally with John McKinley, the chairmand and chief executive of mammoth, New York-based Texaco Inc. Boisi had been told that McKinley was the sort of chief executive who preferred to deal with people with whom he was well acquainted. So Boisi asked Weinberg if he would telephone McKinley to explore Texaco’s possible interest in acquiring Getty Oil.

  Weinberg and Boisi shared a speakerphone. When they reached McKinley’s office, however, they learned that the Texaco chairman was not in—he was spending the holidays at his home in Alabama. Weinberg asked to be transferred to the office of Al DeCrane, Texaco’s president. DeCrane accepted the call.

  “I’m going to put Geoff Boisi on the phone,” Weinberg said after some preliminary pleasantries. “He is the head of M&A at Goldman, Sachs. We’re representing Getty Oil management and the original board in this situation.”

  DeCrane, like nearly everyone else in the oil fraternity, had been closely following, through the financial press, the events surrounding Pennzoil’s tender offer for 20 percent of Getty Oil. He knew what Weinberg meant by “the original board”—those directors adamantly opposed to Gordon Getty. DeCrane was not aware, of course, that Liedtke and Gordon had made a new arrangement for a full takeover of the company; the New Year’s Day deal had not been publicly disclosed.

  Boisi told DeCrane that the Getty Oil directors were in the midst of a board meeting recess. “The sense of the board is that if there was an attractive offer for the entire company, they would sell,” Boisi said. “The museum is a definite seller. Gordon may be a seller or a buyer—he’s probably a seller at some price. He doesn’t want to be a minority party.”

  DeCrane was taking notes as Boisi spoke, and he underlined this last sentence. If a third party were to buy the 12 percent owned by the museum and the 48 percent owned by the public, then Gordon would be left in a 40 percent minority position. He might have no choice but to sell. Otherwise, as Winokur had put it nearly a year before at the Bonaventure, Gordon would be squeezed, he would be the juice.

  “Is Texaco interested, in principle, in making an offer?” Boisi asked.

  “We are.”

  “If the board came to Goldman and concluded that they wanted to sell, to contact people, would Texaco want to be on that list? If the board reached the conclusion that it would like to see who was interested, would Texaco like to have its name presented?”

  “Yes,” DeCrane answered. The Texaco president wanted to know how much information about Getty Oil’s finances would be available to prospective buyers if a sale was undertaken. “If the company goes through some formalized procedure for the sale, would you anticipate that a data room would be established?” DeCrane asked. A so-called data room was commonplace in the auction of a large company. A center containing detailed financial information was established by the seller so that interested buyers could examine materials not publicly available in federal regulatory filings.

  “Yes, that might be a possibility,” Boisi replied. “Is there anything you can say through me to the Getty Oil board about your interest in this?”

  “Just that we would like to be included in a group that might receive information to evaluate the company,” DeCrane answered.

  When the phone call was concluded, Boisi was encouraged, though hardly overwhelmed. DeCrane was clearly interested, but the Texaco president had expressed no urgent enthusiasm. The lanky, nervous Boisi returned to his telephone. All morning and afternoon he placed urgent phone calls, “shopping,” as the merger bankers put it, for a $7 billion customer. He spoke with an officer of Standard Oil of California, known variously as Chevron or Socal. Boisi made essentially the same pitch he had delivered to DeCrane. He got the impression that Chevron was significantly more interested in acquiring Getty than Texaco was, and that the California-based giant would move quickly to study Getty Oil’s finances and line up Wall Street advisors. Boisi also spoke with representatives of Shell, who expressed interest in Getty Oil’s rich Kern River field, and General Electric, who said they might like to buy the ERC insurance subsidiary. There was also a flurry of conversations between Boisi and a number of rival Wall Street investment bankers, all of them eager for information about Getty Oil’s status, all searching themselves for clients who might step in and buy the company, thus generating millions in quick transaction fees. And throughout the day, Boisi spoke frequently with Bart Winokur, who was stationed at the Dechert Price offices in Midtown. Boisi updated Getty Oil’s lawyer about the prospects of a white knight rescue.

  So busy was Geoff Boisi with his shopping spree, in fact, that he was late arriving at the Inter-Continental Hotel for the second session of Getty Oil’s marathon emergency board meeting.

  The scene that greeted him was again one of chaos and confusion.

  The problems had begun even before all of the directors assembled for the three o’clock start. Arthur Liman, Pennzoil’s attorney, was one of the first to arrive. He had spent the day at the Waldorf, discussing with Liedtke, Siegel, and Glanville the $120 proposal slipped under Glanville’s door by Geoff Boisi the night before.

  When he read the proposal, Liedtke had declared simply that it was “outrageous.” The Pennzoil chairman had then made a series of profane remarks comparing New York lawyers and bankers to certain predatory animals. Finally, after a long discussion, Liedtke had agreed to a counterproposal: Getty Oil shareholders could take their choice between $110 in cash and $90 in cash plus a note whose value depended on the price fetched for ERC in an open sale. If Goldman, Sachs’ high estimate of ERC’s worth was correct, shareholders who selected the second option would receive about $115 per share. If Goldman was wrong, they might receive as little as $100. Just before three, Liman arrived at the Inter-Continental carrying a written version of Liedtke’s proposal. He spotted Marty Lipton and handed the paper to him.

  Lipton read it over. “It won’t sell,” the bespectacled attorney declared when he was finished. “It’s too cute. I won’t present it to the board.”

  “Liedtke didn’t even want to make this proposal because he thought the time had come to see whether you and Williams could be counted on to remove the board, since the $110 is the best proposal,” Liman said. “But Glanville, Siegel, and I got him to do this. If Goldman is right in its estimate of what ERC is worth, then the shareholders are going to get $115 to $120 per share. And if Goldman is wrong, the shareholders will take the $110.”

  “I will not present this,” Lipton repeated. “Go back to Mr. Liedtke and get a stub—some kind of debenture or note—plus the $110.”

  They had moved into Gordon Getty’s two-room suite around the corner from Sutton Room II. People were moving in and out; there was a great deal of commotion. Liman picked up the telephone. He called Liedtke and told him what Lipton had said about the new proposal from Pennzoil.

  There were some expletives on the other end of the line.
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  “Look,” Liman said to Liedtke. “There is no way that we are going to get acceptance of a proposal today unless you come up with a sweetener. You may not like it, but that’s what they’re doing to us.”

  “Okay. Offer them on top of the $110 a stub, a right for all the shareholders to receive an interest in whatever we get in selling ERC above a billion dollars after taxes.” Goldman, Sachs had estimated that ERC was worth between $1 billion and $1.5 billion.

  “What about some guarantee, in case ERC doesn’t go for more than one billion?” Liman asked.

  “Okay, if it doesn’t yield more than three dollars extra for the shareholders, then at the end of five years, we will make up the difference. So the shareholders will get $110 immediately plus a guarantee that within five years they will get at least another three dollars. You are authorized to present that to Lipton and tell him that if this isn’t good enough, then I expect him to live up to what he said before.” Liedtke was referring to Lipton’s statement two days earlier that he and Williams would not let the Getty directors stand in the way of a transaction. If the board did not go along with this new plan, Liedtke wanted them summarily removed.

  Liman hung up and turned to Lipton, who was standing just a few feet away. Liman repeated what his client had just said. Lipton did some quick arithmetic.

  “You know, if you discount the three-dollar, five-year guarantee to its present value, you get something worth less than two dollars on the open market. Why don’t you get Liedtke to make a guarantee of five dollars in five years, which would have a present value of about two dollars fifty cents?”

  “Martin, I value my life now,” Liman replied. “I’m not going back to Hugh Liedtke and ask him to bump this again. If you come back to me and the board has approved the whole plan and the only thing it wants is to move the three-dollar guarantee to five dollars, I will undertake to recommend it and sell it to Mr. Liedtke. But I’m not going back and ask him to keep raising it without having a firm deal with you.”

  “I will try,” Lipton said. “It will be very questionable whether Goldman, Sachs will give a fairness opinion at this level.” He wrote down a short note describing the basic terms outlined by Liman and Liedtke.

  Lipton walked down the hall to Sutton Room II. The directors were reconvening. When the door was closed, Lipton described his negotiations with Liman and outlined the terms of the new proposal. The present value of the deal for public shareholders and the museum would be $112.50—$110 in cash plus a guaranteed $5 in five years’ time. Gordon would stand pat and take control of Getty Oil in combination with Pennzoil.

  Speaking for Gordon, Marty Siegel said, “The trust has advised Pennzoil that such a proposal is acceptable to the trust.” A brief discussion ensued about the prospects for a sale of ERC and the prices that might be obtained for the subsidiary. Finally, someone asked Geoff Boisi whether Goldman, Sachs would be willing to issue a fairness letter sanctifying the $112.50 takeover.

  “I’m not prepared to commit as to whether the proposal is fair,” the banker declared.

  Petersen called for another recess, and again the directors wandered through the hallways and adjoining conference rooms. Almost immediately, Marty Lipton asked to speak with Boisi. The two of them, as well as Larry Tisch and Harold Williams, found a place away from the crowd.

  Lipton and Williams argued strongly with Boisi, attempting to persuade him that Goldman, Sachs should issue a fairness opinion for Liedtke’s $112.50 proposal. “Salomon Brothers, the museum’s investment banker, is prepared to give the museum an opinion at that level. We want Goldman, Sachs to do the same,” they said.

  Still, Boisi refused to give in. He said that Goldman had made some preliminary contacts with other companies and had obtained expressions of interest, which he felt would yield a significantly higher price. The young banker was adamant. He would not issue a fairness letter.

  Deeply worried about what might happen if the present impasse persisted, Lipton began to negotiate again with Pennzoil’s advisors. He tried to use Boisi’s refusal to issue a fairness opinion as leverage with Liman, urging the lawyer to persuade Liedtke to raise his offer beyond the five-dollar, five-year guarantee. But Liman, too, was intractable. Liedtke had gone as far as he was going to go, Liman said. It was time for the board to make a decision. Still, Lipton continued to argue and negotiate. He was afraid that if the deadlock was not broken, Pennzoil would simply tender for its 20 percent, combine with Gordon, and squeeze out the museum. Somehow, Lipton felt, a negotiated solution had to be reached.

  After more than an hour of futile talks, the “original” Getty Oil directors—those allied with Sid Petersen against Gordon—assembled in a nearby conference room for a private briefing from Bart Winokur. Geoff Boisi joined the group. Winokur reviewed the dire circumstances faced by the directors. He described the corporate law that governed their power and their decisions, and he listed some of the actions he felt they could and could not take, in each case outlining the board’s “exposure” in future lawsuits. Winokur reiterated the terms of the deal described earlier by Marty Lipton and he updated the directors on the last hour’s negotiations.

  “There are substantial items which we have been unable to clarify and therefore are not going to be able to clarify before we go back into the board meeting,” Winokur said.

  “Based on the information we have, I am unwilling to give a fairness opinion on this transaction,” Boisi added. “I am not ruling out that possibility if we are able to negotiate satisfactory terms in the future.” The banker went on to describe some of his contacts with prospective buyers, such as Chevron and Texaco, and said that he expected to receive proposals from some of them. He could not, however, predict how soon the proposals would come. Even after his arrival at the Inter-Continental that afternoon, Boisi had continued to place and receive calls on the courtesy phones scattered about the hotel’s third floor.

  At one point during this caucus meeting, Winokur and the directors asked Sid Petersen, Dave Copley, and Bob Miller—the three Getty Oil officers present—to leave the room. They complied. Winokur told the remaining board members that he wanted to talk with them about employment contracts and legal indemnities for the company’s top executives. Winokur was concerned about threats Gordon Getty had made against Petersen and Copley. He thought Getty Oil’s executives should have both legal and financial protection—amended “golden parachutes”—in case Gordon gained control of the company. The directors agreed, and they asked Winokur to discuss the matter with Lipton. Winokur did, and Lipton said that he would speak with Gordon and the other directors to secure their agreement.

  Just after six, the Getty Oil board members and their coterie of advisors returned to Sutton Room II. Marty Lipton, who had been thrust—or who had thrust himself—to the center of the negotiations, reviewed in detail the terms of the $112.50 offer by Pennzoil and Gordon Getty. When Lipton was finished, several questions were asked about the mechanics of the deal. And then, finally, more than twenty-four hours after they had begun, the directors decided to vote on the $112.50 proposal by Pennzoil and Gordon Getty.

  “I have concerns,” Chauncey Medberry said before the poll was taken. “I have a different opinion as to values. Major shareholders are making it impossible for us as directors to perform our duty as well as we might. I think more is to be obtained for the shares.”

  “Most of us feel that the real value of the company under normal circumstances is greater, and our investment bankers have so stated, but under the circumstances we cannot obtain it,” Harold Stuart replied.

  Alfred Taubman, the Detroit shopping-mall magnate recruited to the board by Ann Getty, interrupted to recount a tale from the Midwest.

  “There’s the story about the Michigan boy that dated the girl with a pimple on her nose,” he told the directors. “After he married her, he said, ‘If you marry a girl with a pimple, you can’t divorce her for acne.’ If public shareholders bought stock in a company with two large sha
reholders—Gordon and the museum—they should be aware of the potential problems. It’s like dating the girl with the pimple on her nose.”

  “Except in this case, she didn’t used to have the pimple,” Harold Stuart quipped. Stuart was referring to the company’s long era of calm before the deaths of J. Paul Getty and Lansing Hays.

  On that unusual note of levity, Harold Williams moved that the board accept Pennzoil’s proposal, provided that Liedtke could be persuaded to go to a five-dollar guarantee—a present value of $112.50. All of the directors voted in favor, except Chauncey Medberry, who again voted no.

  The $112.50 proposal had passed. Gordon Getty, apparently, would become the chairman of Getty Oil.

  Sid Petersen asked if there were any other items to be brought before the board. At Harold Stuart’s suggestion, there was a unanimous acclamation praising “the splendid job done by the chairman in handling the meeting under difficult conditions.” Thus flattered, Petersen was then enriched. The directors, including Gordon, unanimously approved a proposal by Henry Wendt to indemnify Getty Oil’s top executives against future lawsuits arising from their actions during the previous eighteen months, and to favorably amend the employment contracts, or golden parachutes, of “key executives of the company whose careers were likely to be affected by the change in management.”

  What remained was to persuade Hugh Liedtke to formally raise his offer to $112.50—at the moment, he had not actually authorized anything above the three-dollar ERC guarantee, with a present value of just over $111. Marty Lipton told Petersen that he would carry the news of the directors’ vote to Arthur Liman and attempt to get a final confirmation from Liedtke. As Lipton left the room, the board meeting temporarily recessed.