“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 calmed down and leaned back in his chair. “Boy,” he said, “if I had known they were doing to do this, I wouldn’t have stayed up so late last night. This thing has gone from a lot of fun to no fun at all real fast.”
Just then a phone call came in for Joe Flom. It was Marty Lipton. At last! Lipton would no doubt be relaying word from First Boston. Flom trundled off into one of the bedrooms to take the call. His negotiations with Lipton were almost always conducted in deepest secrecy; not even Pickens got to listen in on their talks. It was all part of the mystique of the merger pros: when the deal hung in the balance, they could face each other down in private. At least part of the reason Joe Flom got hired in these deals was because he was supposed to be the man who could handle Marty Lipton (and Wasserstein), and part of the reason Lipton got hired was because he was supposed to be able to handle Flom. Whether that was in fact how it worked was something the corporate executives in these deals never got to find out; presumably that’s the way Lipton and Flom preferred it.
Flom emerged from the bedroom with a new First Boston proposal in hand. They deal was this: to get Cities to drop its tender offer, Mesa had either to sell its block of Cities stock back to Cities for the same price it had paid (about $45 a share) or to sell the stock on the open market at the going price (probably around $55 a share) but pay Cities a $35 million fee for the privilege of doing so. The point of the $35 million fee, it seemed to Pickens and the others, was to embarrass him. Cities wanted to be able to say that it had forced him to pay $35 million to say independent. In addition, Flom reported, Mesa had to sign something called a standstill agreement, in which it promised not to buy any Cities stock for five years. Cities, on the other hand, would not have t make a similar pledge about Mesa.
“Basically,” said Flom, “it’s a $35 million holdup. The silver lining in the thing is that it means they don’t want you. They’re looking for some kind of agreement. But they’re betting you won’t be willing to bet your company for $35 million. And we’re betting they’re not willing to screw up their deal for $35 million.”
Stillwell nodded his agreement. “It’s down to another blinking contest.”
Flom stood up and got ready to leave the suite. It was lunchtime, and he had a date with Bruce Wasserstein. He explained to Pickens that the lunch had been scheduled a long time ago and that it concerned another matter – no doubt a deal in which the two of them were working the same side of the fence. Before Flom left, Pickens gave him a message to take to Wasserstein: he could live with the standstill agreement but not the $35 million fee. Still, he was a little put out to see Flom leave to have lunch with the enemy at such a critical moment. But he didn’t have much time to dwell on it, for ten minutes later Lee called.
“Jimmy,” Pickens began. “are you up to speed on this deal? Well, let me tell you what’s going on here.” Suddenly the only sound in the suite was Boone Pickens’ voice. This was the conversation on which Mesa’s future might ride.
“They’re talking about having a five-year standstill for us while they don’t have any such thing. But the big point is, they are asking us to give them $35 million in the deal. I don’t know if you are aware of that or not. That’s just unwarranted. We’re quite willing to endorse your deal, but I can’t see $35 million holding up a $5 billion deal.”
Pickens listened to Lee’s response for a moment and then continued. “You know my personality well enough to know that I’ll get in a fight if I have to. So if the $35 million stays, we’re going to have to go after your deal with everything we’ve got. Antitrust and everything else. It’s gonna end up costing one helluva lot more than $35 million. Now, I know that won’t bother Marty Lipton a bit. He’ll like that play.”
Again, Lee said something, but the speaker phone was off, so only Pickens could hear him.
“What’s happened in this deal, Jimmy,” he said after a long pause, “is there are some people over there who are vindictive. And that’s unfortunate. What we need in this thing is a cool head like yours who can go in and say, ‘Let’s get this damn thing over with.’ And our relationship goes back long enough that I don’t want to get into a big fight with you. I think if you went in there and calmed the waters, it will be over in two hours, and that’s all there is to it.”
They spoke for a few more minutes and then the phone call was over. Pickens leaned back in his chair and allowed himself a smile. The tension in the room immediately lifted; if Pickens was no longer worried, then neither was anybody else. “He says they’re stretching for this deal at $63,” Pickens told the group. “He doesn’t want to buy Mesa. That’s just a wild idea of Wasserstein’s.”
Fifteen minutes later, Joe Flom called in. He had something to report from lunch: Wasserstein had made a new offer. Mesa could get out of the deal if it sold its bloc kf stock back to Cities for $55 a share and agreed to a five-year standstill. The $35 million fee was no longer part of the deal. “Okay, Joe,” said Pickens, “come on over here and we’ll talk about it.”
Later in the day, Flom let it be known that he thought it was his lunch with Wasserstein that had tuned the tide for Mesa; he had “handled” Wasserstein. Pickens was equally convinced that it was his phone call with Jimmy Lee that had caused Cities to back off. Perhaps they were both right.
It took Flom an hour to return from lunch, and by that time the matter was all but decided. Pickens wanted to take the money and run. The new Cities offer was still $8 a share less than the $63 price Gulf was offering to pay for Cities stock. With Mesa owning 4.1 million shares of Cities, the total difference between the two prices was . . . $35 million. On the other hand, at $55 a share, Mesa would still be making a $10-a-share profit over what it had paid for the stock – $45 million in all. Pickens asked one of his financial people to figure out the profit Mesa could show on its balance sheet as a result of selling the stock at that price. After a few minutes in consultation with his pocket calculator, the man came up with a figure of $24 million. “Better than a punch in the eye with a sharp stick,” said Pickens.
There was another reason Pickens wanted to sell his stock now, rather than wait and tender the tock to Gulf at the higher price. His talk with Lee had convinced him that the Cities-Gulf deal was soft. The more he thought about it, the more he felt that the deal might fall through. If that happened, Cities stock would take a terrible nose dive, and Pickens would end up losing money instead of making it. By midafternoon, when Flom got back to the suite, the $55 offer was looking better and better. Flom went into the bedroom and called Lipton, and the deal was done.
The rest of the day was all silk. Roby and James worked on getting Mesa’s actual Cities stock certificates from the New York depositories where they were kept – no easy matter since the depositories had by then closed for the weekend. Stillwell and Lovejoy went over to Lipton’s office, two blocks from the Waldorf, to hammer out the agreement. And everyone else stayed in the suite, listening to Boone Pickens tell tales of the old days at Mesa Petroleum. At eight that evening, Gaines Godfrey walked over to Lipton’s office to sign the documents for Mesa and pick up two checks totaling $225 million from Cities Service. By eight-thirty, two limousines were parked outside the building where Lipton had his offices. There was a crowd of Mesa people around the limos, waiting for Godfrey to emerge so they could head for the airport and then for home. Boone Pickens sat in the back seat of one of the limousines, with Bea next to him. He was in good spirits, even though he knew that on Monday morning, despite Mesa’s profit, Mesa’s stock was going to take a big drop. That’s what always happened when a deal ended this way. “The first rule in the takeover defense manual is to get your stock price up,” he said. “And if you can’t get your price up, buy someone else first. So don’t worry about ol’ Mesa. We’ll be back.”
Epilogue
On August 6 Gulf Oil announced that it was canceling its merger with Cities Service because of antitrust objections raised by the Federal Trade Commission. Pickens’ instinct had been right, and so was his decision to sell the block of Cities stock back to Cities for $55 a share. The next day that stock plunged to the mid-thirties. This event caused great anguish on Wall Street, particularly among the arbitrageurs, all of whom had thought the deal was a lock and had therefore loaded up on Cities stock. There were stories circulating that the Gulf pullout cost Wall Street as much as $400 million. Some people were even saying that the failure of this deal might have a permanent cooling effect on merger mania.
But on August 13 that talk stopped. Occidental Petroleum, which had been in Mesa’s camp back in June, stepped in and offered to take over Cities. On August 25 Cities accepted the offer. The new offer averaged $53 a share, which meant Occidental was paying $4 billion instead of $5 billion, as Gulf would have done. Even at that price, the deal still qualified as the third-biggest merger in history. Bruce Wasserstein was still Cities’ merger strategist, but the new deal cut his fee in half. Now it was $6.5 million instead of $13 million. Joe Flom received $1.1 million from Pickens for his efforts and went on to represent Occidental in the new deal.
As for Boone Pickens, his stock did drop, as expected. After he returned to Amarillo, Mesa stock got as low as $12, down from about $18, which was where it had been while the deal was running. Not only that, but half the profit he made on his Cities stock – $12 million out of $24 million – was eaten up by the cost of the month-long circus in New York. “We gave a party,” said Pickens, “and it was expensive.”
But in July the rumors started up, and so did Mesa’s stock. First, Pickens was supposed to be getting ready to make a tender offer for Louisiana Land & Exploration. Then, he was said to be negotiating a merger of some sort with a much larger oil company, Amerada Hess. By the end of the summer, nothing had happened in either case. But Boone Pickens was still looking for a deal. All the analysts said so.
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