T. Boone Pickens Jr., chairman of Mesa Petroleum, has billed himself as the champion of the stockholder. Pickens has launched a series of highly leveraged takeover bids for major oil companies, which led to substantial increases in the price of those companies' stocks when they merged with other oil companies.
His targets have included Cities Services Co., which ultimately was acquired by Occidental Petroleum; General American Oil, which ultimately was acquired by Phillips Petroleum; and Gulf Corp., which ultimately was acquired by Chevron Standard Oil of California . All of those acquistions resulted in substantial increases in debt on the balance sheets of the acquirers.
Pickens says the stocks of those oil companies and Unocal, which is his current target, are selling below the value of their assets because the companies have been poorly managed and because they have underutilized their borrowing capacity.
He is providing a service to all stockholders and the economy as a whole by launching these raids, he says, since stockholders realize full value for their shares.
There is no need to worry about the debt being added to corporate balance sheets, said Pickens. The oil companies he raided were underleveraged -- they had excess borrowing capacity, which they should have been utilizing in financial reorganization plans designed to increase the price of their stocks.
"You get into an issue which is awfully complicated, which is: are companies in our country over leveraged, under leveraged or leveraged just right," said Frederick H. Joseph, the next president of Drexel Burnham Lambert Inc., the Wall Street investment firm that has pioneered the use of junk bonds.
"Our argument is that debt is more available than equity capital. Debt is cheaper than equity capital so you are more efficiently capitalizing companies if you do more debt."
The stock market is a "pretty efficient mechanism for measuring long term results," said Joseph. "Inevitably, guys managers who haven't done well claim they've got a wonderful long-term plan: 'If you'll just leave me alone, I'll implement it.' " After 10 or 20 years of such excuses, the market loses patience, he said.
The junk-bond business "is not nearly as big as it sounds because of all the noise it's created," said Joseph. About $1 billion in junk bonds has gone to finance hostile takeovers with another $3 billion committed. "It is a fairly finite market . . . . We have, I would guess, a $5 billion- to $6-billion capacity for unfriendly takeovers . . . . Not every company in America is going to get taken over," said Joseph.