Diamond Merger Opposed by 2 Oxy Directors

The last-minute collapse of the proposed $3-billion merger of Occidental Petroleum Corp. and Diamond Shamrock Corp. had its roots in a concern by two Occidental directors that they were being asked to pay too much for the Dallas-based oil company, sources said Tuesday.

A Wall Street source who asked not to be identified said opposition to the merger within Occidental’s board led Occidental Chairman Armand Hammer to try to negotiate a change in the terms of the deal, leading to its collapse Monday afternoon after an angry telephone exchange with Diamond Shamrock Chairman William H. Bricker.

Meanwhile, analysts said the breakdown in the merger agreement has left both companies vulnerable to an unfriendly takeover and could cost speculators millions of dollars if they can’t quickly find a buyer for the estimated 9 million Diamond Shamrock shares that they bought in the last two days.

The price of Diamond Shamrock stock fell $1.875 on Tuesday in trading on the New York Stock Exchange, to close at $18.125. For the third session in a row, the company was the most actively traded issue, with nearly 3.7 million shares changing hands Tuesday.

Occidental’s stock rose by $1 per share to $25, offsetting the $1 loss it posted a day earlier, but still well below the $27.50 it was selling for a week ago, just before investors learned of the pending merger.

The merger was to have involved a 1-for-1 exchange of stock, but industry experts who questioned the fairness of the deal said this would have given Occidental shareholders stock in the newly formed company worth only $22 to $23 a share, far less than what the company has been trading for lately. Last July, Occidental paid investor David Murdock $40 a share--about $11 over the market price--for his 5% stake in the company, indicating that Occidental directors, if not market investors, thought the stock was worth far more than the value placed on it in the Diamond Shamrock deal.

The source said Occidental directors Robert L. Peterson and Aziz D. Syriani vehemently opposed the merger in a board meeting called Monday to consider the deal.

Peterson is head of Occidental’s IBP Inc. subsidiary (formerly known as Iowa Beef Packers) and has been at odds with Hammer in the past over the direction the company should take. Syriani is president of Olayan Group, an Athens-based trading and investment company that owns about 6% of Occidental’s stock.

Both Syriani and Peterson had reportedly been opposed to the Diamond Shamrock deal since informal negotiations began in mid-1983. The source said both men argued in Occidental’s board meeting Tuesday that the per-share values of each company were not equivalent and that Diamond Shamrock should be offered less than a share of Occidental stock for each of its shares. They voted against the merger.

Just after the meeting, Hammer called Diamond Shamrock’s Bricker. “They had a long talk,” the source said. “I think Hammer was trying to lower the price. He felt under the gun because the arguments by the dissident directors were pretty good. Tempers flared and that was that.”

Neither Hammer nor Bricker could be reached to comment, and outside directors of both firms declined to comment on what had led to the collapse of the merger.

Bricker reportedly was concerned about what role Diamond Shamrock executives were to have played in the new company. He was quoted Tuesday as saying that he thought Occidental’s management was weak, a sentiment often expressed by securities analysts.

Bricker himself did not plan to stay with the merged companies and was to have received up to $5.2 million over the next six years in a severance agreement.

One key, behind-the-scenes player in the merger discussions was Italian investor Vittorio DeNora, who reportedly owns about 3 million shares of Diamond Shamrock stock and about 500,000 shares of Occidental. DeNora is a social acquaintance of Hammer and suggested in 1983 that the two companies might merge, touching off the protracted negotiations.

Occidental denied Wall Street rumors Tuesday that it is considering making another offer to Diamond Shamrock. A spokesman quoted Hammer as saying that the rumor was “totally untrue. We are not considering another offer and we will not consider another offer.”

Wall Street analysts said the companies, particularly Diamond Shamrock, are now vulnerable to being taken over by other oil firms looking to buy oil and gas reserves.

“Diamond Shamrock by default has put itself on the auction block” said Alan Edgar, an analyst with the Dallas brokerage of Schneider, Bernet & Hickman Inc. “Directors have told the market that they’re willing to sell their company at $22 to $25 a share.”