“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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Pickens woke up early on Memorial Day in his Houston condominium, an opulent penthouse apartment on Buffalo Speedway. He began his day in typical Pickens fashion: he jogged several mils and then had a breakfast of cereal and fruit. All weekend long he and his advisers had grappled – unsuccessfully – with what to do about the Cities offer, and it was still very much on his mind. After breakfast he stepped into the shower, and that’s when it hit him. It was an utterly simple idea. “Why don’t we pull an ol’ bear-hug deal?” he thought. Within an hour, he was at Baker & Botts.
A bear hug is one of the oldest stratagems in the merger handbook; it’s a “friendly” offer that everyone knows isn’t friendly at all – a bit like Russia’s embrace of Poland. Unlike a tender offer, a bear hug is an offer made directly to the company’s board of directors (rather than to the stockholders) and is contingent upon the board’s approval. If the offer is high enough, sometimes a board will feel compelled to accept it, even when it doesn’t want to, because of its legal responsibility to act in the best interests of the company’s stockholders. That happens, but not often; most of the time a bear hug is simply a way of putting pressure on the board. It generates press coverage, it alerts the company’s stockholders that there is an offer out there, and usually it is a signal that there is another, less friendly move in the offing – like a tender offer at a lower price. Quite often, a bear hug is the inside fastball that sets up the curve on the outside corner.
Pickens had a little bit of all these purposes in mind when he conceived his bear hug. At the Baker & Botts offices, he laid out his idea to the assembled lawyers. What he wanted to do was call up Cities’ chairman and chief executive officer, Charles Waidelich, and offer to buy out his company for $50 a share. With Cities stock at about $35 a share, that was a 43 per cent premium. (In contrast, the Cities tender offer was only 25 cents higher than Mesa’s closing price of $16.75 on Friday, May 28.) Such a transaction would cost Mesa about $4 billion, half of which Pickens planned to pay in cash and half by issuing $2 billion worth of Mesa stock to Cities stockholders.
“Is there any reason we can’t do this?” Pickens asked.
None of the lawyers could think of any, so he next called his lead back, Continental Illinois, to confirm that he could get the $2 billion in cash he would need to do the deal. The bank said yes; friendly deals are always easier to finance than unfriendly tender offers because the acquiring company can borrow against the assets of the company it’s going to buy.
That taken care of, Pickens dialed Waidelich’s number in Tulsa. “Chuck,” he said, “I want to tell you about an idea we have.”
“I’m not interested,” said Waidelich.
Pickens persisted. “Wait a second, Chuck, I want you to at least hear me out. The offer is for $50 a share…”
“I’m still not interested,” replied Waidelich. “And it’s not a formal offer anyway. It’s not written down anywhere.”
“Hell, we’ll have an offer to you in Tulsa in three hours.”
“I don’t want it,” said Waidelich.
“We’ve got to bring it to you now,” said Pickens coyly. “We have a disclosure problem. Our stockholders need to know that we’ve made an offer.”
“But it’s not an offer,” insisted Waidelich.
“Aw, Chuck,” Pickens said, “you and I have been in business a long time and known each other a long time, and if we in this industry can’t call each other up and explain things like this to each other, then we’ve gone a long way in the wrong direction.” Then he added, “We’ll get you an offer in the morning, and we’ll have to put out an announcement, and I guess you’ll need to call your directors on this.”
“I have no intention of calling them,” replied Waidelich. “We’re not interested.”
But from Pickens’ point of view, it didn’t matter whether Waidelich was interested in the offer or not. The important thing was that the offer was on the table. Late that night, Mesa put out a press release announcing that it had made a $50-a-share offer to the Cities management, and the next day a Mesa lawyer arrived at Waidelich’s office with a letter from Pickens reiterating the offer. At last Mesa was in the play.
To the Mattresses
Tuesday, June 1, New York
On the 39th floor of the Waldorf Towers, the toniest section of one of New York’s toniest hotels, the Waldorf-Astoria, there is a large two-bedroom suite that is leased by the investment house of Lazard Freres. It’s a businessman’s suite, a place where a busy chief executive officer, in town on business, can rest his head by night and do his deal by day. The suite’s color scheme is simple and to the point: everything is done in shades of white. Its main room conveys not so much comfort as function. Half the room is a dining area, the other half a living area (sofa, coffee table, oversized chairs), and between the two, acting as a divider, stands a single wooden desk. There are two tall windows in the room, but the view they offer is one of the most forgettable in New York; only the Chrysler Building stands out to brighten the scene. Although the Waldorf is in the heart of Manhattan, the blandness of the walls and the blandness of the view combine to give the suite a little of the feel of a military bunker, a hideaway 39 stories high. Except for its seven telephones, the suite is cut off from the rest of the world.
This was Boone Pickens’ temporary headquarters in New York, the place where, as they say in the Mafia, he had gone to the mattresses. He had the suite thanks to the good graces of a Lazard partner, a fellow Texan named Jim Glanville (Pickens seems to have a good ol’ boy network that includes every Texas on Wall Street). Glanville told him to keep the suite “as long as necessary,” even though Lazard itself wasn’t in the deal.
It had been late Monday night when Pickens arrived in New York. He had come for two reasons. First, and most immediately, he wanted to keep the negotiations with his partners on track and to get them signed up and Mesa’s unfriendly tender offer readied within a few days. All he had so far was his friendly bear hug, which the Cities board was likely to turn down. He needed now to back that up with the tender offer – a much more serious threat to Cities because the management couldn’t control its outcome. To that end, Pickens had scheduled a Tuesday morning meeting in the New York office of George Gould, the president of the Madison Fund, which was tentatively in the deal for $200 million.
The other reason Pickens was in New York was that, quite simply, that’s where the play was. Texas might be where you could find oil and run a company, but only in New York could you do a deal like this. New York was where all the key players were; it was where you could hear all the rumors, and keep track of how “the Street” was reacting to your strategies, and be in constant touch with all the people on Wall Street who would be making decisions upon which your fate depended. Pickens knew that, and once he got to New York he also knew he wouldn’t be leaving anytime soon.
Pickens had brought an entourage with him. There was his special assistant, a former UT basketball player named John Bush, who had been brought in to man the phones in the suite. There was Robert Stillwell of Baker & Botts, who in 1964, as a cocky 27-year-old associate, had worked on the deal that created Mesa in the first place and had been doing legal work for Mesa ever since, becoming with time one of Pickens’ most trusted advisers. There was Jesse R. Lovejoy, called Bob, a young partner in the old-line New York law firm of Davis, Polk & Wardwell, who maintained a perfect pinstripes-and-suspenders Wall Street appearance while eagerly helping Davis, Polk to jump into the ungentlemanly merger field. There were two investment bankers from the firm of Donaldson, Lufkin & Jenrette: Joe L. Roby, a senior vice president, and Hamilton James, a tall, gangling 31-year-old Harvard Business School graduate who did merger work for the firm but had never been close to a deal this big before. There were, as well, perhaps a hundred other people who worked the Mesa side of the deal, most of them lawyers, but this was the core. If Pickens was the general in this play, then these men were his lieutenants.
For Pickens, there had been good news and bad news in the last few days. The good news was that his bear hug was having some effect on Cities Service. Waidelich might not have considered it a formal offer, but the reporters covering the deal had all treated it as such. Partly as a result of that coverage, there were, as Pickens had hoped, some large Cities Service stockholders – mostly Wall Street portfolio managers – who were calling the company’s management and directors to find out what they were going to do abut the offer. Through the Wall Street grapevine, Pickens heard that the Cities board of directors was now planning a meeting early the following week to consider Mesa’s $50 bear hug. The Cities directors were starting to feel the heat.
The bad news, however, was of much more moment. It was, in fact, the worst setback imaginable: the collapse of his carefully built partnership. Pickens got the first inkling of disaster during his meeting with Gould on Tuesday morning. A phone call came in to Gould from an acquaintance of his, Henry Breck of Lehman Brothers. Along with First Boston, Lehman Brothers was advising Cities Service in the deal, and it didn’t take Gould long to discover that Breck was calling in that capacity. When Breck got on the phone he pointedly told Gould that if he stayed in the partnership with Pickens, “there would be a dirty fight and that Cities had adopted a scorched-earth policy” (as Mesa later contended in a court hearing).
So there they were again: the Cities scare tactics that had worked so well the previous summer. In the face of this threat, Gould did not back down. But the Southland Corporation, it turned out, had also received menacing phone calls from Lehman Brothers threatening a takeover attempt by Cities. And later on Tuesday morning Southland folded its hand.
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