The gladiator from Amarillo gleefully slew his enemy from Pittsburgh one more time.
The approving spectators were a group of money managers and financial analysts who gathered at the Waldorf-Astoria hotel to discuss "Takeovers and Shareholders: The Mounting Controversy." The gladiator was T. Boone Pickens Jr., chairman and president of Amarillo, Tex.-based Mesa Petroleum Co., and his Pittsburgh enemy was Gulf Oil Corp.
Pickens arrived ready to do battle, loyal knights in pin-striped suits surrounding him. At his side were some of New York's savviest investment bankers and lawyers, each of whom played a critical role in Pickens' profitable battle that began in August 1983 and ended last June.
Pickens -- introduced as "the terror of the oil patch" -- and his entourage gave a play-by-play account of how their initial 4.9 percent investment in Gulf at about $39 a share eventually led to Gulf's $13.2 billion merger with Chevron (Standard Oil of California) at $80 a share, the biggest merger in history.
The investor group led by Pickens ultimately purchased 21.7 million Gulf shares (13.2 percent of Gulf's outstanding shares) at an average price of $44.20, giving them a cool pretax, pre-expense profit of $775 million when they sold their stock to Chevron for $80 a share.
Before Pickens arrived, several speakers shared their views about the myriad issues surrounding the takeover wave, but Pickens stole the show, proclaiming himself the champion of shareholder rights and charging Gulf executives with mismanagement and weak leadership. One speaker who followed disagreed -- he said Pickens was a corporate raider looking for quick profits, without any regard for the long-term health or survival of the companies he attacks.
Pickens refused to answer the question many money managers and investors have pondered lately: Which major oil company (Mobil Corp. and Sun Co. have been mentioned in recent rumors on Wall Street) is Pickens going to attack next, and when will the battle begin?
Pickens, who is causing some oil industry executives to spend sleepless nights worrying about how to defend themselves against a hostile takeover, preferred instead to dwell on his battle with Gulf and the reaction he got from some Gulf shareholders.
He distributed a chronological review of his battle with Gulf at the Financial Analysts Federation gathering, highlighting the impact of his strategy on the doubling of the price of Gulf stock. Pickens believes his decision to reveal his plans to analysts and shareholders on Nov. 10, 1983, was critical in his fight to win their support.
At that meeting, Pickens faced a hostile audience, many of whom feared he would sell his 10.8 percent block of Gulf back to the company at a premium price, leaving them holding shares in a volatile situation that likely would result in a big drop in the price of Gulf stock. Pickens promised the group that he would not sell his shares back to Gulf, but instead would do his best to increase the price of Gulf stock for all shareholders.
This strategy helped Pickens develop an image as the champion of shareholder rights and increased his credibility among analysts and investors.
"I gave a talk in Lafayette, La., and a guy grabbed me around the shoulders and hugged me," Pickens said. "He said he owned 5,000 shares of Gulf . I said 'Gosh, I'm glad you didn't own 10,000. You probably would have kissed me.' "
Pickens chose Gulf as a target because he believed its stock was the most undervalued of the major oil companies. One reason for the high level of merger activity in the oil industry has been that the depressed value of oil stocks has made it cheaper for acquirers to pick up oil reserves through mergers than through exploration.
Pickens also chose Gulf because he believed the company had strong cash flow, coupled with a poor record of spending that cash flow for exploration to replace its domestic oil reserves. According to Pickens, the company was a depleting asset that would yield greater value for shareholders if about half of its assets were placed in a royalty trust that automatically would distribute its cash flow to shareholders.
Gulf rejected the royalty trust proposal, stating that it wanted to maintain control of the cash from its producing wells so it could decide how much cash to distribute to shareholders through dividends and how much to invest in refineries, exploration and development. If Gulf had gone along with his idea, the company would have survived as a smaller entity, rather than being gobbled up by a competitor, Pickens said.
Congress has ended the debate over royalty trusts by changing the tax laws to eliminate one of the principal advantages of the concept: avoidance of the taxation of both oil company profits and stockholder dividends. But Pickens has not stopped debating -- and berating -- the decisions made by some members of Gulf's management team during the takeover fight.
When he completed his presentation of the takeover battle, Pickens distributed a speech delivered early last month by Gulf Executive Vice President James L. Murdy.
"When Mesa finally launched its unfair partial tender offer, our board was willing to consider selling the company to a strong merger partner rather than see Mesa steal the company," Murdy said. As a defense against the Pickens investor group, "we looked at buying Mesa, but there were two things wrong with that. First, Mesa was way overvalued, and we weren't willing to make a foolish investment.
"Second, the legal arrangement that the Mesa group had among themselves and the fact they had every device for management entrenchment known outside the communist world -- might include the communist world, come to think of it -- meant we couldn't get control of the Gulf shares even if we bought Mesa. So we dropped that idea."
The debate at the Waldorf over the costs and benefits of mergers and the activities of corporate raiders, who buy big chunks of stock in public companies in the hope of quick profits, came at a time when many executives are advocating private-sector initiatives to curb some abuses. These include greenmail (in which the corporate raider sells his stock back to the company at a premium price that is not offered to all shareholders, frequently causing the price of the company's stock to drop precipitously) and golden parachutes (in which directors authorize special compensation packages benefiting corporate executives that only take effect in the event of a merger).
On the morning of the conference, management expert Peter F. Drucker added controversy to the debate when he argued in The Wall Street Journal that unfriendly takeovers benefit no one except the raider, and a few investment bankers and merger lawyers who earn hefty fees for providing merger-related advice.
"A good many experienced business leaders I know now hold takeover fear to be a main cause of the decline in America's competitive strength in the world economy -- and a far more potent cause than the high dollar," Drucker said. "It contributes to the obsession with the short term and the slighting of tomorrow in research, product development, market development and marketing, and in quality and service -- all to squeeze out a few more dollars in next quarter's 'bottom line.' "
Drucker's argument rests on the premise that one of the best defenses against a hostile takeover is a high stock price. Therefore, fear of takeovers may lead managers to make nearsighted decisions that produce higher quarterly profits, and presumably higher stock prices, while avoiding investments that will benefit the corporation in the long run, if they depress short-run profits.
"Indeed, the great majority of companies acquired through an unfriendly takeover have done worse under the new ownership than they did when they were independent," Drucker said. "One reason for this is that the successful raider immediately strips his new acquisition of its best assets and drains it of cash -- both to repay what he borrowed to buy the business and to make a quick killing.
"It is thus highly debatable whether the unfriendly takeover is even in the best interest of the shareholders. It may be more nearly correct to say -- as a banker friend of mine said recently -- that in its opposition to any restriction on takeovers, the SEC Securities and Exchange Commission , founded to protect the investor against the financial wolves, has now become the protector of the wolves," Drucker said.
"Drucker's article was absolute poppycock, and I have never disagreed with anything more," money manager Robert G. Kirby, chairman of Capital Guardian Trust Co., told the group.
Those who debated these issues at the conference agreed that the primary responsibility of corporate managers is to maximize the value of shareholders' holdings. However, differences of opinion appeared quickly when one of the panelists asked, "But over what time frame?"
Another area of disagreement surrounds the "business-judgment rule," a legal standard that generally holds that directors of corporations act in an informed manner, in good faith, and in the best interests of the companies they direct. This issue has reached the center stage as corporate lawyers have used the business-judgment rule to defend all decisions by directors, including the use of sophisticated takeover defenses, and the approval of plans to take public companies private through transactions that frequently include managers and directors as investors, raising questions about conflicts of interest.
Because the business-judgment rule assumes that directors act in good faith on behalf of shareholders, those who believe directors sometimes act in their own self-interest or to protect management have a difficult time winning lawsuits against directors.
Congress is expected to hold hearings on the business-judgment rule next year.
The panelists agreed that the brisk level of merger activity requires "a level playing field," one that gives corporations, raiders and, most importantly, shareholders sufficient legal protection and power to guard against systemic abuses, such as the 10-day period investors may wait before disclosing to the SEC that they have acquired 5 percent or more of a company's stock.
The 10-day waiting period has been criticized because some investors may benefit by learning about the transaction before the public, and because additional stock purchases beyond the initial 5 percent may be made during the waiting period by the investor. The SEC has proposed legislation that would close this 10-day window.
The question over who should have principal regulatory authority to monitor hostile takeovers also is being reviewed. States traditionally have regulated target companies, giving them power to defend themselves against unfriendly takeovers. The federal government traditionally has regulated the bidders.
Some have argued that the federal government ought to get involved in regulating target companies because of the high level of antitakeover amendments added to corporate charters without state regulatory opposition. A recent study by the chief economist of the SEC, "Shark Repellants: The Role and Impact of Antitakeover Charter Amendments," concludes that antitakeover provisions reduce shareholder wealth.
There also have been proposals to pass legislation that would require any bidder seeking more than 10 percent of a company to make the same offer to all shareholders. This would eliminate the inequities caused by "front-end loaded, two-tiered tender offers" that offer a premium price to some shareholders, possibly leading to greenmail (when the bidder sells his stake back to the target company) or to unequal opportunities for stockholders to get the same price for their tendered shares.
These proposals, known as fair-price amendments, are designed to protect minority shareholders after a bidder has acquired a large block of shares. In general, fair-price amendments require the bidder to pay minority shareholders at least as much as the highest price paid to acquire shares already held.
Another concern voiced at the conference was that the continued independence of corporations increasingly seemed to depend less on the quality of management than on the creativity of a corporation's lawyers and investment bankers who devise sophisticated antitakeover defenses.
Ultimately, the key issue centers on achieving the right balance between the easy transfer of corporate control through hostile offers and friendly mergers, and the distracting effect increased merger activity has on paranoid executives who become more interested in the latest takeover defenses than in running the respective businesses they lead.
Because when that happens, it is the shareholders who suffer.