The Getty Oil Takeover Fiasco

There are few episodes in the world of finance that offer as much high drama as the Getty Oil takeover. It was the largest takeover in history and it involved major players like American financier T. Boone Pickens, as well as Ivan Boesky and Martin Siegel, who gained public notoriety in the '80s for insider trading.

When American industrialist and Getty Oil founder J. Paul Getty died in 1976, his company was left in financial disarray. Getty Oil was family owned, but the Getty family members fought among themselves as often as they worked together. With the help of the Getty Oil board, J. Paul Getty's youngest son, Gordon Getty, was chosen as a co-trustee.

Gordon Getty seemed the ideal choice because, although he had a personal share in the company, he had always been more interested in composing and opera than he was in the family business. That all changed with the death of his co-trustee, C. Lansing Hayes Jr., in 1982. Suddenly Getty controlled 40% of Getty Oil, which stimulated his interest in the company's future. (Trusts are an estate plan's anchor, but the terminology can be confusing. We cut through the clutter, read Pick The Perfect Trust.)

While Getty wanted to control Getty Oil, he showed no desire to participate in actual day-to-day operations. This became evident when he decided to help the board find a solution to its biggest problem: Getty Oil's stock price was in the doldrums. The company had oil in the ground worth around $100 a share, but the company struggled to keep its stock around the $50 mark. Without consulting the board, Getty took it upon himself to talk with Wall Street professionals about reviving Getty Oil's share price. The professionals he picked were leveraged buyout specialists and takeover artists, including corporate raider T. Boone Pickens.

Pickens told Getty that Getty Oil was ripe for the corporate restructuring that was sweeping Wall Street. Pickens wanted Getty to increase the management's ownership through financial re-engineering so that the managers started thinking and acting like owners. Gordon Getty thought highly of the advice and set up a meeting between Pickens and the chairman of Getty's board, Sidney Peterson. (Why go to all this trouble? Find out in Why Companies Care About Their Stock Prices.)

Peterson was stunned that Getty had shared sensitive company information with a well-known raider and forced Pickens to sign an agreement stating that he would make no unsolicited bids for the company. (Learn about the strategies corporations use to protect themselves from unwanted acquisitions in Corporate Takeover Defense: A Shareholder's Perspective.)

Peterson left the meeting convinced that Getty was attempting to take control of the company. Gordon Getty furthered this notion when he met with another set of takeover specialists, the Bass Brothers, who suggested a share buyback. To stop Getty from leaking company secrets to everyone on Wall Street, the board agreed to have investment bank Goldman Sachs value Getty Oil. At the same time, Peterson began looking for a way to either dilute Getty's holdings or instate another co-trustee to rein him in.

In July 1983, Goldman Sachs suggested that Getty Oil initiate a $500 million a year stock repurchase plan. On paper, it was a reasonable conclusion, but in reality it turned the board and Getty against each other. A buyback would give Getty control of the company by increasing his 40% to a controlling interest of more thn 50%. At this point, the board feared Gordon Getty far more than a weak stock price. At the meeting, Getty famously said, "What I really want is to find the optimum way to optimize value." After an uncomfortable silence a board member said, "Gordon, you might know what you just said, but no one else in the room does."

The motion was defeated and the board and Getty became embroiled in one of the ugliest fights in corporate history. Getty knew that he could overturn the board if he managed to get the 12% of the stock controlled by the Getty Museum on his side. He set up a meeting with museum president Harold Williams. Williams was concerned that Getty was trying to make a power play and he hired a corporate lawyer specializing in raider defense.

True to Williams' fears, Getty came to the meeting with a godfather offer. Getty had a prepared a document saying that the trust and the museum removed all the Getty directors and replaced them; new directors would be appointed by Gordon Getty. In return, Getty would buy the museum's shares at a very agreeable price. Williams' lawyer foresaw years of shareholder suits if such a deal were signed, so Williams abstained.

Soon after, the Getty board found out about Getty's attempt to dump them en masse and they hired a team of specialists to help build takeover defenses. (From godfathers to perps, to familiarize yourself with the "criminal elements" creeping around Wall Street, read Handcuffs And Smoking Guns: The Criminal Elements Of Wall Street.)

To counter the board's team, Getty turned to Martin Siegel at Kidder and Peabody. The three parties - the board, the museum and Gordon Getty - were convinced to sign a one-year standstill agreement that precluded any of them from selling their shares. On the day the agreement was to be ratified, the board waited for Getty to leave the room and then announced that they had found a Getty family member to file suit against Gordon Getty. Getty's 15-year-old nephew, Tara Gabriel Galaxy Gramophone Getty, would sue his uncle to force the introduction of a new co-trustee. This type of underhanded tactic convinced Williams to side with Getty in trying to sell the company.

The legal battle was a clear signal to the market that Getty Oil was ripe for takeover. Hugh Liedtke of Pennzoil became the black knight by tendering a private offer to Getty of $100 a share. The intention was that Liedtke would buy 20% of the outstanding shares, get a seat on the board, buy the museum's shares, and team up with Getty in a deal that would give Getty and him complete control of the company. Williams agreed in principle if the price for the museum shares was raised to $120. Liedtke timed his bid for December 27, 1983 - a time when most of his competition would be away for the holidays.

Around the same time, arbitrageur Ivan Boesky bought  a large amount of Getty Oil stock; it later brought him a huge fortune. It turned out that the tip had come from Marty Siegel. (Here we look at some of the landmark incidents of insider trading, read Top 4 Most Scandalous Insider Trading Debacles.)

The board wanted to form an alliance with Getty against the Pennzoil bid. They knew they were doomed, so they wanted to buy back shares and then auction the company to the highest bidder. In a board meeting attended by all the lawyers and investment bankers, the museum acted as arbitrator with Williams refusing to sell to anyone unless the board agreed to the deal.

Liedtke's offer was upped to $110 per share for the outstanding shares. This put the board in a bind in which refusing the deal offering a price higher than the current price would mean shareholder lawsuits, but a sale could also trigger lawsuits for selling at a price below the $120 per share at which Goldman Sachs had valued the company. The Goldman Sachs rep, Geoffrey Boisi, refused to sign a document saying $110 was a reasonable offer, at least partially because he too was hoping a gray knight would swoop in with a higher offer, thus bringing the takeover banking fees to his firm.

The board rejected the bid with a request for 90 days to find out what the company could get on the open market. Getty refused. The board asked him straight out if he had a secondary agreement with Pennzoil unknown to the board and Getty responded that he would need to talk to his advisors before answering. The question was asked with all the lawyers in the room and it was revealed that Getty and Pennzoil had agreed to try to fire the board if the deal was rejected. The mood in the room quickly soured, but by now all of Wall Street was pushing for a big deal despite internal discord, and all the players were feeling the pressure. (CEOs, CFOs, presidents and vice presidents: learn how to tell the difference in The Basics Of Corporate Structure.)

Liedtke was told $120 would close the deal, but he only raised the offer to $112.50 with an additional $5 in a few years. The agreement was made in principle and all parties had agreed in principle, issuing a statement to that effect. Meanwhile, Boisi found his gray knight in the form of Texaco Chairman John K. McKinley. Texaco's management contacted Boisi to ask if there had been a deal and Boisi said it was made in principle but was not final. Texaco's team then asked how much they should offer. Texaco offered $125 per share and the museum sold to Texaco, as did Gordon Getty. Texaco now had a controlling interest. Liedtke, who considered the deal done and had already celebrated, was furious.

The Getty Oil - Texaco deal stands as one of the ugliest takeover battles in Wall Street history. Despite that, the end result benefited all of Getty Oil's shareholders. That wasn't the true end of it, however, as Pennzoil filed suit and eventually was awarded $11 billion in fines and damages. Pennzoil further pursued Texaco into bankruptcy and the bitter war raged on in courts until a settlement of around $3 billion was reached. The Getty Oil saga is an example in which financial reengineering both helped - remember investors in Getty Oil saw their underperforming holdings jump by over 50% - and harmed. There will always be a need for management shake-ups and restructuring, but maybe not of the Getty Oil type. (If a company files for bankruptcy, stockholders have the most to lose. Find out why in An Overview Of Corporate Bankruptcy and Taking Advantage Of Corporate Decline.)