Millions of dollars of advertising couldn't buy an endorsement as powerful as the one Phillips Petroleum Co. gave the investment banking firm of Drexel Burnham Lambert Inc. this week.
Phillips, the giant Bartlesville, Okla., oil company that has been fighting for its independence, reached an agreement with Carl C. Icahn ending his hostile takeover bid. But Phillips refused to sign the pact unless Icahn's investment banker, Drexel Burnham, signed an agreement not to represent anyone else interested in Phillips.
Phillips was worried that Drexel would find another client to raid the company once Icahn was out. While standstill agreements with investors are common, no other investment banking firm ever has entered into the kind of agreement Phillips asked Drexel to sign, according to Drexel officials. And Phillips is the third company in less than a year to demand, as part of an overall settlement ending a takeover attempt, that Drexel agree not to represent other parties interested in launching new bids.
The agreement is evidence of the dominant position of Drexel Burnham in representing corporate raiders in hostile acquisition attempts. No other investment banking firm has Drexel's ability to raise billions quickly to finance such activity.
"Without them [Drexel] being subject to the standstill, it wouldn't have been very effective," said Joe O'Toole, a Phillips vice president. "They're the ones who seem to have a lock on the junk bond market. . . . They definitely have access to that market more than anybody else, they may have a monopoly on it."
O'Toole was referring to the junk, or unrated, bonds Drexel can place with a variety of aggressive institutional and wealthy individual investors to finance hostile takeover bids. The firm's ability, first displayed publicly in T. Boone Pickens Jr.'s raid on Gulf Oil, makes it possible for individuals such as Pickens, Icahn and New York investor Saul Steinberg to attempt takeovers of the largest U.S. corporations.
Last June, Drexel agreed, as part of Disney's greenmail peace pact with Drexel client Saul Steinberg, not to represent anyone else interested in Disney for two years. Last August, Drexel agreed, as part of Avco's settlement with Drexel client Leucadia National Corp., not to represent anyone interested in Avco for one year.
"I think it is a compliment," said John Sorte, a Drexel managing director involved in negotiating the agreement with Phillips. Sorte said Drexel will earn a fee of about $14 million for representing Icahn in his raid on Phillips.
"We can arrange these financings and others can't," said Frederick H. Joseph, head of Drexel's corporate finance department. "I think it [the agreement with Phillips] is an amazing professional endorsement. I'm flattered and proud, but . . . maybe we're being too aggressive.
"Effectively we're agreeing not to represent anyone who wants to accumulate a position in Phillips or arrange a tender offer. It is unusual for a financial intermediary. . . . If you can keep us from representing someone, no one else can do the deal."
Joseph said such agreements may provide another investment banking firm with an opportunity to get into the business of financing billion-dollar hostile takeovers. But others may find it difficult since they lack Drexel's pool of sophisticated, wealthy investors willing to purchase high-yield bonds, preferred stock and other paper to finance these raids.
Moreover, Phillips plans to add billions of debt to its balance sheet in the next few months, making it unattractive to a raider, a factor Drexel took into account.
Morgan Stanley & Co., which represented Phillips in the negotiations, asked that Drexel agree not to represent anyone for 15 years, but the firm refused.
The thinking at Drexel is that it will take Phillips about three years to sell off enough assets to reduce its debt to a level that will make it attractive to a raider once again. By that time, Drexel no longer will be bound by its agreement.