Phillips Petroleum Co. paid a raider's ransom today to remain an independent operating oil company, ending the latest chapter in an accelerating drama of billion-dollar corporate takeovers.
Phillips' price for settling its battle with corporate takeover specialist Carl C. Icahn was heavy, leaving the company far in debt and forcing it to sell some $2 billion of its assets to finance its escape. Details on Page D1.
To keep control of the company, Phillips' management had to top Icahn's $8.5 billion offer with one worth $56 to $57 a share, according to the company -- some 25 percent higher than the stock price just three months ago, before the company fell into the speculators' sights.
The hostile takeover battle for Phillips follows raiders' campaigns against Gulf Corp., Walt Disney Productions and dozens of other recent targets. To some experts, these deals are the initial waves of one of the most drastic restructurings of American industry in decades, and they have spurred a sharp policy debate. The questions include:
* Whether the stock market has become a casino where a corporation's ownership and fortunes can turn on the whims of a handful of speculators.
* Whether long-time investors in a company have any more rights than short-term speculators who buy their stakes and then launch their campaigns; and whether private investors have the same rights as big-time professional investment managers at powerful institutions such as pension funds and insurance companies, who can swing millions of shares of stock behind a raider's bid.
* Whether corporate raids represent stock-market speculation gone mad, or whether they are a legitimate check on poor management that can help force needed restructuring of companies whose management is unwilling or unable to make changes necessary to stay competitive.
"There's a need for rethinking almost all of the rules of the game in almost all areas of corporate takeovers," said Columbia University law professor Harvey J. Goldschmid. "The question is probably raised as to whether the national economy in a global sense is getting a proper payback from the kind of activity that is going on."
"In our view, this activity is not in the national interest," Phillips Executive Vice President Charles Kittrell told a congressional subcommittee hearing last month. "The critical issue is whether we want to encourage the short-term speculator out for a quick buck over the long-term interests of our corporations."
For Icahn, the rewards of his three-month-long raid on Phillips were staggering. The settlement announced today would give Icahn a profit of between $75 million and $85 million if he sells his stock to Phillips. And Phillips will pay Icahn $25 million to cover a substantial part of the expenses he rolled up in waging his campaign.
Raiders such as Icahn and T. Boone Pickens Jr., whose move against Phillips preceded Icahn's, see it much differently, however. They say that managements aren't running companies with stockholders' rights in mind, and they aim to change that by giving themselves and other stockholders a quick and large return on their investment.
Certainly, Phillips shareholders have seen the price of their stock go up since the company came under an initial attack by Pickens. On Dec. 3, the day before Pickens made his offer, Phillips stock was trading for $45. To fend off Pickens, Phillips made an initial offer to shareholders it valued at $53 a share. Then Icahn showed up with his bid, offering an average of $55 a share, which Phillips topped today by several dollars a share. Phillips shareholders -- especially those who have owned the stock for more than a few months -- clearly have ridden the raiders' coattails to a profitable windfall.
"We have an important message. Something must be done about mediocre management in this country," Icahn said. "There is supposed to be corporate democracy. We are supposed to have a vote. Managements are supposed to be answerable."
"Mergers and acquisitions are a natural function of the free market. They serve as discipline for weak managements," Pickens said. "The companies involved in mergers and acquisitions are not owned by managers, but by shareholders. It is the shareholders' interest that should be paramount."
"Nobody likes a messenger that bears bad tidings, but the reality is that some of these industries need to be changed," said Harvard Business School professor Robert R. Glauber. "There are substantial benefits from this activity. It's not useless paper entrepreneurship."
But Icahn and Pickens are not altruists. Neither are other well-known raiders such as Minneapolis financier Irwin Jacobs and New York investor Saul Steinberg. "I freely admit I'm not Robin Hood," Icahn said. "I'm an investor, and I want to make a profit."
Pickens has taken a somewhat more populist stance, making himself out to be a friend of the small shareholder. But as a painting of him as a poker player with a pile of chips beamed out from a flattering cover story in Time magazine last week, he and his associates were preparing to collect $89 million in profit on their investment in Phillips; over the past few years, he has earned something just this side of $1 billion with what critics see as hit-and-run raids on other companies.
Many critics question whether Pickens, Icahn and other speculators are really owners in the truest sense, regardless of what their newly minted stock certificates say. Since Pickens first revealed his interest in Phillips on Dec. 4, about 110 million shares of Phillips stock have changed hands, many of them more than once, as speculators have bought into the company. The figure is roughly equal to 70 percent of Phillips' shares outstanding.
Not only has Icahn taken a 5 percent stake to go with Pickens' 5.8 percent, but millions of shares have been bought by institutional investors and risk arbitragers, who make a living playing the short-term upswings in stock caused by takeover attempts and other factors.
"The people who have come in and acquired stock in the company in the last two or three months are not your stockholders; they're not interested in the company," Phillips shareholder Harold Stuart said at a company stockholder meeting the other day. "All they want is an extra dollar, an extra quarter. I hate to use this word, but we call them prostitutes."
"The question is, who does the company exist for? You can say it exists for the shareholders, but that raises a second question: Shareholders over what time frame?" asked Robert Reich of Harvard University's Kennedy School of Government.
The issue is complicated by the fact that short-term shareholders have to buy their shares from somebody, and that somebody, at least in the initial stages of a corporate battle, is usually an investor who has held the stock for a long time. In the case of Phillips, many long-time investors, confused or scared by the machinations surrounding the company in recent weeks, simply have sold their shares and taken their money somewhere safer.
The raiders have more than their share of followers on Wall Street. A company's stock goes up when a raider takes an interest in it, because scores of other investors -- mainly institutional holders and arbitragers -- trust the raiders' instincts for a good thing and know that, where there's Pickens or Icahn, there's usually fired-up stock value. It's almost a self-fulfilling prophecy: A stock rises when a raider buys it in large part simply because the raider has bought it.
Similarly, the raiders have no trouble finding allies in financial circles. Where once it took a corporate behemoth to raise the billions of dollars needed for a large-scale takeover effort, now veritable one-man shows such as Icahn and Pickens can raise huge amounts of cash through increasingly interested partners.
In taking steps to defend themselves against a takeover, as with Phillips' refinancing plan, many companies are assuming huge debts, and many economists argue that this debt strains credit markets and hurts the companies by leaving them vulnerable to interest-rate increases and draining away cash flow for interest payments that otherwise might be used for corporate operations or expansion.
Like many experts, former Securities and Exchange Commission chairman Harold Williams is concerned that some of the defenses erected by corporate managements may be just as bad as the abuses they are designed to prevent. When companies make it more difficult for a simple shareholder vote to change control at a company, "This whole idea of corporate accounting to stockholders is being washed down the drain," he said.
"What is clear is that those making this kind of attempt at times are doing some good things," Goldschmid said. "They're helping to replace weaker or uncreative management; they're spurring new thoughts on how business should be run; they're helping management work for efficiency and stockholder good."
Williams is concerned, however, that managements may be overreacting and concentrating too much on short-term stock gains at the expense of long-term development.
But in at least one case, the raiders are virtually restructuring an industry. The repeated attacks on oil companies by Pickens and others are forcing the companies, in an already tough market, to shape up their operations and revitalize lagging efforts, all in the name of shoring up their stock prices. Icahn has suggested that, if the steel industry had been stalked the same way and forced to make similar changes a few years ago, the nation's Rust Bowl might be a little shinier.
The reaction in Congress, however, has not been praise for the raiders, but increasing calls for regulation of their activities.
"I think you don't want to prohibit unfriendly takeovers, but you probably want to reorient the playing field to make it somewhat more difficult -- and simultaneously somewhat more difficult for entrenched management to play their games," Reich said.
Goldschmid suggested formation of a national commission to examine the issues involved, with perhaps a contemporaneous moratorium on hostile takeover bids.
Williams went even further, calling for a five-year moratorium on unfriendly takeover offers.
But many experts believe that the current situation is basically healthy, and that existing laws are adequate to control takeover activity. "The laws as they are currently structured neither unfairly favor those who want to try to take over a company, nor those in management who want to try to repel them," Glauber said, although he added that some fine-tuning, such as restrictions on greenmail, in which the raider convinces the company to buy out his stake at a premium, might be needed.
Here in Bartlesville, however, what they wanted -- short of Carl Icahn's scalp -- was for their company to be left alone.
In his remarks before Phillips shareholders last month, Bartlesville jeweler Joseph Derryberry closed with a prayer for his town: "Almighty God, let all men know love can't be bought. The price? Too low. It's in our hearts. You'd have us grow. Not in a purse that overflows. Amen."