Trying for More
POOR GULF OIL. Mounded by corporate thugs for six months, the company finally gave in two weeks ago--for $13.2 billion. In a desperate, last-ditch effort to avoid the clutches of Texas buyout cannibal T. Boone Pickens, executives of Gulf--the seventh largest oil concern in the country--sold out to Standard Oil of California, the eight largest.
Pickens's assault on Gulf was both brutal and spooky. Pickens, the head of the Mesa Petroleum Company, a small but pesky outfit, has through a series of obnoxious buyout threats acquired a terrible reputation in the industry. The history of his Viet Cong-style hit-and-run attacks on corporations far bigger than Mesa goes back to 1982.
Originally, Pickens embroiled himself in a tug-of-war with the late Citgo in the summer of 1982. In trying to take over Citgo, Pickens found Citgo returning the assault with its own takeover bid for Mesa.
Ironically, that time it was Gulf that stepped in as Pickens's savior when it looked like Mesa might just lose. Gulf offered to buy Citgo, freeing Mesa, then declined to do so. Citgo eventually went to Occidental Petroleum.
By reselling its stock to Occidental, Mesa made a painless $12.5 million for simply hiring an army of bankers and lawyers to scare Citgo, and Pickens was excited about the possibilities. Two more unsuccessful but lucrative takeover bids by Mesa followed, and in August of 1983, having received his baptism in fire, was ready for the big time.
Pickens teamed up with several partners and began buying up Gulf shares when they were worth $39. By October 14, Pickens owned about 9 percent of Gulf, and he tried to squeeze himself into Gulf's management to make it easier to buy more.
Gulf officials, fearing Pickens as much as they detested him, moved to keep the oil bandit out by rechartering their company as a Delaware corporation rather than a Pennsylvania one, relying on technical obstacles to Pickens's bid to gain control.
Pickens and Gulf battled for control through proxies with the stockholders, and when Pickens lost in December, Gulf foolishly figured it had won. Pickens would have had somehow to convince half of Gulf's stockholders to choose him as a director, and the company doubted he would be able to with his small portion of the outstanding stock. They relaxed.
At the same time, however, Texaco was waging its own frontal assault on Getty. In early February number-six Texaco beat number-nine Getty, having come up with $12 billion to buy out the smaller cousin--setting a new record for the biggest corporate takeover.
The willingness of bankers to arrange the huge Texaco loan brought a new company into the Pickens vs. Gulf fight. Atlantic Richfield, moving to increase its oil reserves, offered Gulf $70 a share in mid-February.
Gulf headily rejected the bid, figuring it could get more on the market once it carried through its plans to dump its Canadian subsidiary and reorganize its refining and marketing.
But Pickens heard about the rebuffed Arco bid, and sold $300 million of securities to come up with the cash for a $65/share bid for about 12 percent of Gulf's shares, to add to the 9 percent of the company he already controlled.
Gulf was scared, so scared that, to fend off Pickens, it went public on February 24. As the oil world shook itself out, three buyers emerged by the March 14 purchase deadline--Arco at $72, Socal at $80, and an extremely complicated offer worked out by some Gulf executives with the help of a financial house which specializes in this kind of corporate jihad. Although the in-house offer would have reaped the most--$87 per share with plans to spin off the least profitable branches of the company to increase its overall attractiveness--it was too complex to be digested and worked out by the March 14 deadline. And so Gulf went to Socal, the high bidder.
ADMITTEDLY, this is a very convoluted and shady tale. But it reveals just how President Carter's 1979 wild deregulation and the Reagan Administration's flaccid anti-trust prosecution efforts have combined to produce exactly what both Administrations said they would not--vicious interboardroom wars instead of increased oil exploration.
In the three years after Carter deregulated the industry, exploration and production have increased 115 percent and earnings have zoomed 147 percent. But mergers and acquisitions--the majority of which have been extremely unfriendly--have exploded 600 percent.
Part of the reason for the unbridled growth in what might be called the takeover industry has been attributed to oil companies choosing the easy way out. Instead of exploring for oil and gas they capture another company, along with its ever more lucrative reserves. In buying Gulf, for instance, Socal spent $13.2 billion but got $15.4 billion worth of reserves after discounting for the cost of buying the company. Texaco got $10.4 billion in reserves when it snatched Getty.
Quite simply, all the easy oil has already been pumped. Exploration costs per barrel now stand at about $15--which leaves little room for profit on a barrel of oil commanding a $29 world price. Last year the 20 largest oil companies in the U.S. found only 60 percent as much petroleum as they refined.
But more fundamentally, corporate takeovers are fabulously worthwhile. Pickens made $760 million profit in his "unsuccessful" effort to buy Gulf, and Gulf's stockholders ended up with an additional $5.3 billion.
Although Congress has just recently woken up to the danger of the oil takeovers--not to mention similar horror stories in the steel and railroad industries--nobody has done anything to stop them. The 1961 Reagan tax cuts for corporations gave them the fuel for their orgiastic frenzy of violent buyouts: the impotence of his attorney general in stopping them has acted as encouragement.
Reagan would do well to open his eyes to what these buyouts mean for his rosy economic plans. While his huge budget deficit is the most obvious culprit in tightening up the loan market, $12 billion and $13 billion loans to oil companies to engage in utterly unproductive takeovers further restrict available credit with nothing to show afterward except inflated (or bruised) corporate egos and wealthy lawyers. (Socal's bankers and attorneys walked off with $60 million when the dust settled.)
In addition, when the Texaco-Getty and Socal-Gulf deals go through--Reagan's Justice Department is unlikely to require more than that they unload some of their departments to make the companies seem less, huge--fully 57 percent of the nation's oil reserves will be controlled by just eight companies, and their hold on refining and distributing will be strengthened.
It would, indeed, be very surprising if Reagan's Justice Department requires more than token adjustments in the new $50 billion Socal-gulf company. Reagan can claim no significant anti-trust prosecutions during his tenure--despite the mergers that have resulted in 30,000-mile railroad giants like Norfolk Southern and Southern Pacific-Santa Fe, and the recent rumblings in the steel industry where U.S. Steel, Republic Steel and LTV Corporation, three of the five biggest steel companies in the country, are planning mergers and acquisitions.
Deregulation should not mean encouragement for corporate moguls to attack each other in heady games involving billions of dollars' worth of the nation's potential seed money. The anti-trust legislation is already in place to fight back against the clustering of wealth and power in a small group of oilmen and profiteering kamikazes--and it must be used.