The Getty Oil Takeover Fiasco

Few episodes in the world of finance 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. In this article, we take a look at how this event unfolded and its outcome.

Death and Opera

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 of directors, J. Paul Getty's youngest son, Gordon Getty, was chosen as a co-trustee.

Gordon Getty seemed the ideal choice. Although he had a personal share in the company, he was always more interested in composing an opera than he was in the family business. That all changed with the death of his co-trustee, C. Lansing Hays Jr., in 1982. Getty suddenly controlled 40% of Getty Oil, which stimulated his interest in the company's future. 

Meeting With T. Boone Pickens

While Getty wanted to control Getty Oil, he showed no desire to participate in actual day-to-day operations. He decided to help the board find a solution to its biggest problem: the company's stock price was in the doldrums. It 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' Role

Pickens told Getty that Getty Oil was ripe for the corporate restructuring that was sweeping Wall Street. He wanted Getty to increase the management's ownership through financial re-engineering so the managers started thinking and acting like owners. Gordon Getty thought highly of the advice and set up a meeting between Pickens and board chair, Sidney Petersen.

Petersen was concerned about Getty consulting Pickens as well as investment bankers about the share price. He felt it would make the company appear to be for sale and attract unwanted interest. He took steps to conceal these consultations. This would be the first step of many the corporation would take to defend itself against an unwanted acquisition.

Petersen was convinced that Getty was attempting to take control of the company. Gordon Getty furthered this notion when he met with another set of hostile 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, Petersen began looking for a way to either dilute Getty's holdings or instate another co-trustee to rein him in.

Battle in the Inner Sanctum

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 than 50%. 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. 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 prepared a document saying that the trust and the museum would remove all the Getty directors and replace them. Gordon Getty would appoint new directors. 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. The Getty board soon found out about Getty's attempt to dump them en masse, and they hired a team of specialists to help build takeover defenses.

Enter a Black Knight and Boesky

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. The board waited for Getty to leave the room on ratification day and announced that it found a Getty family member to sue Gordon Getty. His 15-year-old nephew, Tara Gabriel Galaxy Gramophone Getty, tried to force the introduction of a new co-trustee, which 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 if the price for the museum shares was raised to $120. Liedtke timed his bid for Dec. 27, 1983, when the competition would be away for the holidays.

Around the same time, arbitrageur Ivan Boesky bought a large amount of Getty Oil stock, bringing him a vast fortune. It turned out that the tip came from Martin Siegel.

Double Cross

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 an 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: Refusing the deal that offered a price higher than the current one 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' valuation. The Goldman Sachs representative refused to sign a document saying $110 was a reasonable offer, partially because he hoped a gray knight would swoop in with a higher offer, 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 if he had a secondary unknown agreement with Pennzoil. 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 agreed to try to fire the board if the deal was rejected. The mood in the room quickly soured. By now, all of Wall Street pushed for a deal despite internal discord while the players felt the pressure.

Triple Cross

Liedtke was told $120 would close the deal, but he only raised the offer to $112.50. The agreement was made in principle and all parties agreed in principle, stating to that effect.

Boisi found his gray knight in Texaco chair John K. McKinley. Texaco's management contacted Boisi to ask if there was a deal and Boisi said it was made in principle but was not final. Texaco's team 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 already celebrated, was furious.

The Bottom Line

The Getty Oil-Texaco deal stands as one of the ugliest takeover battles in Wall Street history. Despite that, the result benefited all of Getty Oil's shareholders. That wasn't the true end of it, however, as Pennzoil filed suit and was eventually 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.

This 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.