“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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We live in the age of the corporate merger. Mergers have been with us for a long time, of course, but only in the last decade have they been perceived by the people running publicly held companies as a normal part of what it takes to do business. As recently as the sixties, takeovers were still thought of as exotic, and merger and acquisition strategies were unrefined and unsophisticated. Today, mergers are such a fixture that most companies large enough to be listed on the New York Stock Exchange have employees whose jobs consist solely of scouting out other companies that might make attractive acquisitions. Most of these same companies also have on retainer New York investment bankers and lawyers specializing in takeover law, just in case they decide to take the plunge and make an acquisition – or in case some other company tries to acquire them.
The image all this merger activity inevitably brings to mind is the game Pac Man, with companies scurrying around in frantic search of other companies to gobble up, lest they themselves be gobbled. In the first half of 198 there were 1198 mergers, which cost the acquiring companies $27.8 billion. The First Boston Corporation, an investment banking house that has the most aggressive and competitive mergers and acquisitions department on Wall Street, recently announced that in 1981 it had a hand in 39 mergers (costing the companies involved well over $22 billion) – an average of one deal every ten days. In the first five months of 1982, First Boston had already had a hand in 34 deals, or one every five days.
In the long run, many mergers have turned out badly for both parties, and they haven’t done the country as a whole much good either. In general, mergers don’t create new jobs, don’t do anything to expand the economy, don’t help make American business more competitive with foreign importers. They use up capital that could have been spent far more productively. But they continue to proliferate just the same, for reasons having to do as much with the culture of big business as with “economies of scale” or any of their other supposed dollars-and-cents benefits. Mergers are a quick and easy way for a company to get much bigger, and so they give an ambitious chief executive officer a means of expanding his empire. To the chief executive officer of a profitable, smooth-running company, for whom the daily routine has become humdrum, a merger play offers a chance for adventure. It is impossible not to get caught up in the excitement of a merger fight, to become exhilarated by the twenty-hour workdays spent with the smartest people in American business, to begin thinking, “There is nothing more important than what I’m doing right now.” The investment banking firm that most plays to this sense of executive machismo – First Boston – has also been the most successful at the merger game in recent years. But to some extent, all the various Wall Street institutions have made a great deal of money lately simply by pumping up the competitive instincts of American businessmen. Businessmen like T. Boone Pickens, Jr., Wall Street’s favorite oilman.
Friends
Wednesday, May 19, Houston
Boone Pickens harbored a special contempt for Cities Service. In Pickens’ opinion, Cities, for the nine years that he had been casting covetous glances at it, had done everything wrong. It made diversification decisions that always seemed to sour. It had all that acreage but wasn’t very good at finding oil and gas. Its stock was always undervalued. On Wall Street, Cities had a reputation as a plodder, but Pickens didn’t even give the company that much credit. He thought Cities was mismanaged, and he was not shy about saying so – especially in the presence of Wall Street analysts. The Cities management knew full well what Pickens thought of the company, and consequently their dislike of him went beyond pure business judgment. In the summer of 1981, at a time when Wall Street was full of rumors about a possible takeover of Cities Service, Charles J. Waidelich, the company’s chairman and chief executive officer, had told reporters that Cities was not interested in being bought; potential suitors, he had said, “should buzz off.” He didn’t mention any names, but everyone on Wall Street knew he was referring to Boone Pickens and Mesa Petroleum.
In fact, Pickens had made his first serious run at Cities that summer. First he bought up 4.1 million shares of Cities stock – 5 per cent of the company – for $180 million. But he couldn’t hope to make a tender offer to go for 51 per cent; Mesa was simply too small to be able to borrow the billions of dollars that it would take. Instead, he came up with an unusual idea: he would make his tender offer with the help of partners – other oil companies that saw in Cities the cheap oil reserves that he saw. Tender offers are never done with partners, but Pickens had no choice. By early summer he had lined up two companies to go in with him: Freeport-McMoran and Louisiana Land & Exploration.
In mid-August, however, Cities found out about the partnership and began to play very rough. One of its investment bankers called Freeport and Louisiana Land and told them that if they didn’t back out, Cities would take them over. That was the end of Pickens’ partnership. Round one to Cities.
Round two began about a month later, when Pickens started looking for a new set of partners, convinced that the deal could still work. It was an arduous process, but by late this spring it was falling into place, and by the time Pickens got back to Texas from his trip to see the analysts in Boston, he had decided it was time to call a meeting. On the Wednesday after his return from the East, his lawyers and his financial people trooped downtown to Mesa’s Houston offices in the Dresser Tower to hear him try to take a group of bankers out of a little money. About $1 billion, to be precise.
To open the meeting, Pickens made a short statement, telling the bankers that he hoped to make a tender offer for Cities stock on June 1 and that he hoped they would keep the information they were about to hear confidential. Then the lawyers and financial people filled the bankers in on the details, such as they were: Mesa would raise $1 billion by selling to a group of partners either stock that Mesa would issue or, later, Cities oil reserves. (The bankers didn’t know it yet, but the partners were the Southland Corporation of Dallas, which owns the 7-Eleven chain; the Damson Oil Corporation of New York; the Madison fund, a New York investment firm; and the Sunshine Mining Company, a Dallas concern that runs a number of American silver mines.) The partners’ $1 billion would serve as collateral for $1.3 billion that the bankers would then lend to Mesa to complete the financing. With that much money, Mesa could offer $45 a share for 51 per cent of Cities stock – about $10 higher than the stock was bringing on the market.
As his associates talked, Pickens walked out of the conference room with one of his aides. He was pleased to see the deal coming together, but he was worried that it wouldn’t remain secret for much longer, because dignified forms of spying are a staple of takeover fights. He turned to the aide. “Look back there and tell me what you see,” he said.
“I see a roomful of people,” the aide replied.
“That’s right,” said Pickens. “And they all have one friend they can trust.”
First Strike
Friday, May 28, Tulsa
Pickens was right. Within days of his meeting with the bankers, word of it had leaked back to Cities Service’s headquarters in Tulsa. Now Cities realized it was in a battle for its life, and it began plotting its counterstrategy.
That strategy was unveiled two weeks later, and it was consummate hardball. On Friday, May 28, Cities issued a press release that read in its entirety:
Cities Service Company said it intends to commence a cash tender offer to purchase up to 51 per cent of the voting power of Mesa Petroleum Company at $17 a share. First Boston Corporation and Lehman Brothers Kuhn Loeb will act as dealer-managers [meaning Cities’ investment bankers] for the offer.
Cities had launched a preemptive strike, and a very clever one at that; for a targeted company to defend itself by going after its attacker was a brand-new strategy in the takeover game. Although there was some question in Pickens’ mind as to whether Cities really wanted Mesa or was just trying to scare him off, there was no question at all that it could swallow Mesa if it so desired. So the Cities offer was a real threat. In making the tender, Cities had shown unexpected life – it wasn’t the sort of thing plodding companies usually did. And Pickens, so wrapped up in pulling his partners together that he hadn’t spent much time thinking about what Cities was doing, had been caught completely by surprise.
The Bear Hug
Monday, May 31, Houston
To understand the dynamics of a corporate takeover fight, you need mainly to keep in mind one length of time: twenty business days. Under federal law, when a company makes a public tender offer for a block of another company’s stock, twenty business days must pass before the tendering company can actually purchase the stock. During that time, stockholders (meaning primarily the major portfolio managers on Wall Street, who control the fate of almost every major American corporation) who want to sell their shares “tender” them to the acquiring company. When the twenty days are over, the amount of stock the offer has attracted is announced and the acquiring company knows whether it has succeeded – that is, drawn 51 per cent of the target company’s stock – or failed. The waiting period is a frenetic, tense time: Wall Street comes alive with rumors, reporters scramble all over the story, and to the targeted company the twenty days seem like the grimmest of deadlines.
This, then, was the predicament Boone Pickens faced the day after Memorial Day: the Cities offer was about to begin, and the twenty-day clock would start counting down. Pickens did not yet have his partnership lined up, but even if he accomplished that within the next few days and made his own tender offer for Cities stock, Cities would still be in a position to buy Mesa before Mesa could buy Cities. That was an awful thought. It was imperative, Pickens and his advisers all agreed, that he to do something, and do it quickly and publicly, if only to get Wall Street know that he was still in the game. The important thing was to keep the ball in the air until the Mesa team could get the partners in line and go forward with the attention to blocking the Cities offer. But what could they do now?
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