“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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Just as his dinner was served, however, the deal intruded, in the form of a man from another table who walked over and introduced himself to Pickens. Pickens stood up to greet him while the others at the table, most of them lawyers working on the deal, continued eating. The man turned out to be an employee of Cities Service, and he was just drunk enough to say exactly what was on his mind. “I hope you beat the pants off them,” he told Pickens. “They’re a bunch of f―ing assholes. They don’t know what they’re doing. The best thing that could ever happen to Cities would be for you to get them.”
Pickens grimaced his way through this little diatribe, but when the man left, he happily recounted the conversation for the benefit of the others at the table who had missed it. “Boy,” he said, “it’s just amazing how much Cities is disliked.”
After dinner, the Pickens party walked the six blocks back to the Waldorf, where they bumped into Mesa’s vice president for finance, Gaines L. Godfrey, and several other Mesa financial people who were in New York to help get the bank consortium in place. The entire group, now numbering about ten, went into the Waldorf’s lounge for a nightcap.
“Well, how did it go today?” Pickens asked Godfrey, once they were settled in their seats.
“Pretty good. But we still haven’t gotten in touch with the people at Texas Commerce.”
“Gaad!” said Pickens with a laugh. (He is on the board of Texas Commerce Bancshares, so its inclusion in the deal was almost a foregone conclusion.)
“Gaines, did you hear about the letter we got today from Richard Ware at the Amarillo National Bank? He wrote us this letter saying he was behind us 100 per cent, and that if we needed any money, we could count on him for $5 million.”
Everybody smiled. “What we ought to do,” said someone else, “is tell him that we’ve raised $995 million and his $5 million will put us over the top.”
The smiles turned to chuckles. “It’s pretty nice of him just the same,” said Pickens.
A Day at the Races
Saturday, June 5, New York
Alan Habacht sat down at the table, put his napkin in his lap, looked up at Pickens, and said eagerly, “I want to hear everything that’s happened so far. From the beginning.” Pickens smiled. It was one o’clock Saturday afternoon, and Habacht had come by the suite to have lunch.
Habacht, Pickens’ friends, is the analyst with Weiss, Peck & Greer. He has watched Mesa for a decade, and wherever he has worked, his firm has had Mesa stock in its portfolio, in no small part because of Habacht’s faith in Pickens. Habacht sticks with Pickens because Mesa has made him money in the past and he expects Mesa will make him money again.
Habacht suggested the lunch partly to get the story of the deal from the horse’s mouth and partly to offer his support. But as both men knew, what Pickens needed most from Habacht – that he keep Weiss, Peck & Greer’s Mesa stock away from Cities Service’s tender offer – was simply not possible. That would conflict with the firm’s duty to the people who had entrusted their money to it. Assuming (as everyone on Wall Street did) that Cities would raise its offer, Habacht needed to have tendered his stock in order to reap the maximum gain. During lunch, Habacht spelled out his dilemma in a mildly apologetic voice, but Pickens brushed it off. “I know you have to tender your stock, Alan,” he said. “That’s the smart play.”
As they ate the soup and sandwiches sent up by the hotel’s room service, Pickens regaled Habacht with the story of the deal so far, going over the convoluted plot in great, laborious detail. Then, with Habacht up-to-date, the two men retired to the more comfortable living area of the suite. Pickens picked up a copy of the Cities annual report from the coffee table. He flipped to the back page, where the company’s board of directors was listed, and went down the list one by one, trying to guess how each director would vote on the Mesa bear-hug offer at the Cities board meeting, which was now three day away.
This had become Pickens’ favorite game in the past few days because he was convinced that the board was going to call him in to begin negotiations. Every one of his advisers thought there wasn’t a prayer of this happening, and Joe Roby had bet him $200 on the outcome of the board meeting.
Habacht looked down the list of directors. “You’ve got ten outside directors and three inside. That’s thirteen altogether,” he said. “The three inside you can forget about, so that means you need seven out of the ten to win. I don’t think it’s there. Where do you see it?”
“I’ll tell you what’s going to happen,” said Pickens. “One of the guys on the board who owns a lot of that stock is going to say, ‘You fellas are sitting here with no interest. I’m sitting here with a million and a half shares. Those shares were worth $68 and now they’re worth $38’ – see how convincing this speech is, Alan – ‘and it’s not even a comfortable $38. That little ol’ company is holding the price of our stock up.’” Pickens believed – probably correctly – that the only reason Cities stock had not dropped below $30 a share was that Wall Street expected Mesa to make some kind of run at Cities.
“‘So what I’ve really got,’” said Pickens, finishing his Cities director’s speech, “‘is a $68 to a $38 to an $18 if Mesa is out of this play. Now I’m 50 points down – that’s a $75 million hit – and I’m not liking it. And that’s where I’m headed if you guys sit here today and tell me we’re not going to consider a $50 offer.’ Your turn, Alan.”
Habacht laughed. “I’m not going to get into this with you because I’ll lose,” he said. “But I’ll tell you this: I’ve been around long enough to learn that they are going to find a way to turn you down. You can’t possibly expect to win this thing at the board level. Am I wrong?”
“You’re wrong,” said Pickens. “Yes.”
Habacht chewed that over for a minute and then changed the subject. “Is there any way they can get you?” he asked.
“Oh, yeah, I guess,” replied Pickens. “But you can’t worry about that. We can always get a white knight if we have to.”
“White knight” is Wall Street jargon for a company that comes into a deal at the behest of the company under attack and makes a higher bid for it. The target company still ends up being taken over, but by someone it considers friendly to its interests – and to its management.
“Is the white knight there?” asked Habacht.
“No. I haven’t worked on a white knight,” replied Pickens. “Between you and me – and don’t repeat this – the only way they are going to beat us is if they find a white knight themselves.”
As Habacht was rising to leave, he and Pickens got to talking about the Belmont Stakes, which would be running in a few hours, and Pickens was reminded that a friend of his had a horse in the race. He pulled from his pocket a small roll of bills and peeled off a $100 bill. “Put that on Estoril for me, Alan. The guy who owns this horse says it’s the best horse in the race. He was real excited – said he was going to win the thing going away.” Habacht took the bill and left. Estoril came in seventh.
The 10 Per Cent Solution
Monday, June 7, New York
The Mesa tender offer – for 15 per cent of Cities Serivce’s stock at $45 a share – was launched on Monday morning, right on schedule. The bank consortium was lined up; the documents were readied and flown to Washington, where they were filed with the Securities and Exchange Commission; and the reporters covering the deal had all received phone calls on Sunday night from Pickens in which he had briefed them on his latest move. By the time the New York Stock Exchange opened at nine o’clock, everyone on Wall Street knew that Boone Pickens was doing a Dome deal and Cities’ stockholders had twenty days to tender their shares to Mesa. The clock was ticking.
With the market open, the first question for the people in suite 39-F of the Waldorf Towers was how was Wall Street reacting to the Mesa tender offer? At ten-thirty the first answer came in. Cities stock was at 36 7/8, down 1 1/8 from where it had closed on Friday. A bad sign. If Wall Street had thought Mesa was going to succeed in swallowing Cities, the professionals would have begun buying Cities stock, intending to sell it to Mesa (because holders of an acquired company’s stock always make a fat profit by selling to the new owner), and the price would have jumped instead of fallen. To find out why that wasn’t happening, Bob Lovejoy went into one of the bedrooms and called several Wall Street arbitrageurs.
All the large investment houses have arbitrage departments, which make their money by betting on the outcome of a merger. Arbitrageurs – or arbs, as they are called on Wall Street – buy stock at the market price in the company they expect to lose the battle and tender it to the expected winner at the takeover price, which is always avoe market. In a small merger fight, the arb community sometimes controls so much stock that it can decide the outcome. The Mesa-Cities deal was far too big for that, but the arbs were still worth talking to, partly because they were the chief conduit of Wall Street rumors and partly because everyone else on Wall Street would be influenced by what the arbs were doing.
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