“It’s Time To Make a Deal”
Take a trip inside a world you’ve never seen before – the billion-dollar world of a Wall Street merger – with an Amarillo oilman who’s staking a 25-year career on one wild roll of the dice.
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Amax is a mining company that in March 1981, with its stock trading at $38 a share, had turned down a $78.50-a-share takeover offer from Standard Oil of California. Socal backed off, and within a year, Amax stock fell to the mid-twenties. This sequence of events had infuriated a lot of Amax stockholders. Ford, as a member of the Amax board, had been one of those voting to kill the deal; whether or not it made stockholders happy, he had preserved his own well-paying place on the Amax board.
“We just thought that the offer was not in the best interests of the shareholders,” said Ford.
“Boy,” said Pickens, “that makes me think the people on the Cities board may be able to convince themselves of the same thing in this deal.”
A little later, during his turn at the podium, Pickens again brought Cities Service into the proceedings. In the hallowed tradition of masters of ceremonies, he began by telling some bad jokes. “I hear Ringling Brothers is thinking of buying Cities Service,” he said. “They want to get the clowns that are running that company.”
Reagan threw his head back and let out several loud, practiced chortles, but much to Pickens’ surprise, few others in the room seemed to know what he was talking about. Pickens tried a second Cities joke. Again, no response, except from the president, who had been to so many of these affairs that he could turn on the laugh track whether he understood the jokes or not. What was going on here? Didn’t people read the papers? Weren’t they following the biggest deal of the year? For three weeks Pickens had been wholly consumed by the Cities fight, and everyone he came into contact with on Wall Street was nearly as interested in it as he was. He had lost his sense of perspective. He thought was he was doing was just about the biggest thing happening in America at that moment, and he expected everyone else to think so too. But of course they didn’t. Pickens hurried through the rest of his remarks, introduced the dignitaries sitting at the head table, and sat down. Then he folded his arms on his chest and slowly, wearily, closed his eyes, as if to shut out the world.
The White Knight
Thursday, June 17, New York
From the start, Boone Pickens had expected that Thursday, June 17, would be the most important day of the deal – and it was, but for a reason entirely different from the one he had in mind. Pickens looked forward to Thursday because it was Mesa’s proration date, the day he would know whether Cities’ shareholders had tendered enough stock to him to provide the hook to snare a partner. As it turned out, he did get enough stock, but just barely. The final figure in the Mesa proration pool was 44.5 per cent; coupled with the 5 per cent Mesa already owned, it gave Mesa 49.5 per cent of Cities. It was not quite majority control, but it was so close that the Mesa strategists all felt sure that it was enough to attract a partner; after all, with that much stock in the pool, Mesa could always buy a few shares on the open market to push the figure above 50 per cent.
However, at on o’clock that afternoon, the proration figure suddenly became completely meaningless. At that moment the new flashed across the Dow Jones wire that an unnamed company had just offered “over $60 a share” for Cities stock. Cities had agreed to the offer. Ever since he had come to New York, Pickens had said that “a white knight is what can beat us in this deal.” Now it had happened. For Mesa, the deal was over.
By late that afternoon, the basics of the new deal had been unveiled. The white knight was Gulf Oil, the sixth-largest oil company in America. The price Gulf was paying for Cities Service was $63 a share. Assuming the deal cleared the federal government’s antitrust hurdles – something both Cities and Gulf assured their stockholders would happen – Cities was going to cost Gulf $5 billion, making it the third-largest merger in history. What Pickens hadn’t known was that for 48 hours Cities and Gulf had been furiously negotiating; nonetheless, when the announcement was made, he didn’t find it completely surprising. He knew the people at Gulf. They liked the idea of acquiring cheap reserves on Wall Street as much as the next guy.
What, in the end, had driven Cities to find a white knight instead of just buying Mesa? On paper, Cities had all the advantages – it was bigger, stronger, and ahead in the timing of its tender offer. And yet, while each Mesa move had been more ad-libbed than part of some grand design, when you added them all up, they combined to put great pressure on Cities. The Cities team had learned from its sources about Tom Brown and realized that when he came into play, Cities’ time advantage would be lost. Cities also knew that Pickens was out hunting up partners, and if he found them, Cities’ financial advantage would be lost too. Like everyone else on Wall Street, Cities expected hordes of its stockholders to tender their shares to Mesa. Seeing all this, seeing that the company was in danger of being taken over by T. Boone Pickens, Jr. – whom Cities’ management reviled and who would surely fire them all the moment he had control of the company – Cities’ management clearly became desperate for a way out. A white knight, even though it meant Cities would lose its independence, was the safest answer, at least as far as its executives’ jobs were concerned.
Of course, it was also possible that Cities had just panicked. There was one piece of evidence that suggested as much. After the ink had dried on the Gulf-Cities pact, it was revealed that on Friday, June 11, the day Cities learned that its tender offer had drawn 45 per cent of Mesa’s stock, it had renegotiated the agreement with its investment bankers, First Boston and Lehman Brothers. In the original agreement, the investment banks would each have received fees of $2 million; under the new arrangement, Cities agreed to pay each of its investment bankers $1 million for every point its stock was sold above $50 a share. On that day it was suddenly in First Boston’s and Lehman Brothers’ best interests to sell Cities off to a white knight. “When I heard about that,” one analyst said later, “I knew Cities was dead.” Why would Cities sign such an agreement right in the heat of battle if it didn’t think it was about to lose to Mesa? What was in it for First Boston and Lehman Brothers is less difficult to fathom. Thanks to that last-minute agreement, they stood to split $26 million in fees from the Gulf-Cities deal.
Now all Pickens wanted was to cut bait and get back to Texas. There were just a few loose ends to tie up. He would have to decide tomorrow what to do with the 5 per cent block of Cities stock he owned – whether to deal it back to Cities, or sell it on the open market, or put it in the Gulf tender offer. And although the Mesa tender offer for Cities had been preempted by Gulf’s higher offer, the Cities tender offer for Mesa was still on the table. That would have to be taken care of, too. But in all likelihood, he thought, he would be on the way to Amarillo by noon on Friday.
Thinking that his work in New York was largely finished, Pickens made a reservation at “21” for himself, Bea, and several of the people who had been with him the past three weeks: Stillwell, Lovejoy, Jim Glanville, Joe Roby, and a few others. But before he left the suite for his last dinner in New York, he had a few phone calls to make. He called Amarillo and spoke with several Mesa directors who were awaiting word from him about the events of the day.
“We did agree on something here,” Pickens said after explaining the Gulf offer to them. “We all signed it on a pink doily. We agreed that we would not go for any takeover target larger than $1.4 billion, and the second thing is – and I like this part the best – no partners!” Everyone laughed. “If the deal can’t be done with Mesa, Tom Brown, and Mike Boswell [the president of Sunshine Mining], we’re not going to look at it. tom and Mike are the only ones who have the balls to go for the deal.”
“What’s happens if they keep tendering?” one of the directors asked.
“I don’t know,” said Pickens. “But they’re ready to quit.”
“They don’t want us,” added Stillwell, who as on another extension, “and they never wanted us.”
Pickens placed one last call, to Midland, to tell Tom Brown that the deal was over. He was effusive in his thanks. “We’ll be back,” he said.
“Tell him he gets four days of free legal service from Baker and Botts,” said Lovejoy. Everybody laughed.
“And we’ll write him a will,” chimed in Stillwell.
“Tell him we may still need him,” said Roby. But nobody seemed to notice that last remark.
The Kicker
Friday, June 18, New York
On his last day in New York City, Boone Pickens woke up with a hangover. At eight-thirty, when most of his team arrived at the suite, he sat slumped in one of the oversized chairs by the coffee table, his monogrammed shirt open at the collar and his head resting against his right hand. He looked bleary-eyed.
Dinner at “21” had been a semisweet affair; there was no small pride taken in the knowledge that they – little Mesa Petroleum of Amarillo, Texas – had been the force that brought about the third-largest deal in American history. “We put a $5 billion deal in play with no money,” Stillwell had boasted several times. But there was also disappointment that the play was over and they had not come away with the brass ring. There had been several rounds of drinks during dinner, and a few bottles of wine, and afterward, Pickens, Stillwell, and Lovejoy had returned to the suite, where they drank whiskey and talked about the deal until three in the morning.
My Library
