Newport Firm to Sell Back Shares : $80 Million in Cash Ends Smith Quest for Gearhart

One of the longest and most expensive corporate takeover battles in U.S. history ended Monday when Smith International Inc. of Newport Beach and Gearhart Industries Inc. of Fort Worth jointly announced an $80-million cash settlement.

The agreement, reached after four months of negotiation, was approved unanimously by the boards of directors of both companies and puts an end to Smith’s lengthy battle for control of Gearhart, a Texas high-technology oil services company.

The settlement will return to Smith about half of the $163 million it paid for its 5.3-million shares of Gearhart stock. In return, Gearhart will be freed of court restraints associated with the battle and will recover control of its own destiny. Additionally, neither company can buy shares of the other for 10 years, and both sides will drop all lawsuits filed against each other in Texas and California courts.

The battle not only cost both companies millions of dollars but caused their stock prices to plummet at a time when the market for oil-drilling equipment has been depressed. About $16 million of Smith’s $37 million in interest expenses in 1984 were related to debts incurred in the purchase of Gearhart stock. Smith’s short-term debt increased from $69 million in fiscal 1983 to $140 million in fiscal 1984, according to Smith officials. Because of the takeover battle, Smith has not released its earnings for 1984, ended Dec. 30, but the company has predicted a loss.

And some industry analysts believe that the fight has left Smith, the aggressor, vulnerable to a takeover attempt itself because of Smith’s heavy borrowing to buy the Gearhart shares. Rumors of a Smith takeover by another oil field equipment giant have been circulating on Wall Street, but so far, no specific company has made a bid for Smith.

Smith, which makes oil-drilling equipment, said it wanted to acquire Gearhart’s technology in order to pioneer a new line of “smart” oil-drilling tools. The two companies had been discussing possible business combinations for nearly 20 years, but nothing definitive had emerged.

A Loss on Shares

Under the agreement, Smith will sell its Gearhart shares back to Gearhart, or its investment banker, New York-based Drexel Burnham Lambert Inc. In the next week or so, Drexel Lambert plans to register the sale of the shares with the U.S. Securities and Exchange Commission, according to a Drexel spokesman. After the Gearhart shares are sold, Smith is expected to receive about $15 a share--shares for which it paid between $21 and $31.

“I think under the circumstances, it’s a fair settlement that allows both companies to get on with their business,” said Jerry Neely, Smith’s chairman and chief executive officer, in an interview Monday. Neely declined to say how much Smith has spent fighting for control of Gearhart, except to say, “It’s been an expensive proposition of time and effort.”

Smith, which employs about 2,000 people in four divisions in Orange County, and about 8,000 worldwide, has been cutting back its work force in the wake of the slump in oil-drilling equipment sales. It recently reduced its corporate staff by a third.

“I just woke up from this damn nightmare,” said an elated Marvin Gearhart, chairman and president of Gearhart Industries, in a telephone interview. “It’s good for everyone. I feel wonderful.”

Smith’s stock closed Monday at $11.625, down 25 cents on the New York Stock Exchange. On April 30, 1984, the day Smith filed its tender offer for control of Gearhart, Smith’s stock closed at $19.625 a share. Gearhart stock, which stood at $30.25 on April 30, 1984, closed Monday at $11.50, up 12.5 cents on the New York Stock Exchange.

Knew He’d Win

Gearhart, who said he never doubted he would win the battle, said the company spent about $7 million in legal and consulting fees to remain independent. Last July, as part of its defense against Smith, Gearhart purchased Geosource Inc., a Houston drilling-services company, for $318 million in cash and stock. The acquisition of Geosource from Aetna Life and Casualty Co. of Hartford, Conn., effectively gave Aetna a 38% stake in Gearhart and placed friendly Aetna directors on Gearhart’s board. Geosource, a seismic services company, is bigger than Gearhart, with about 8,000 employees and $500 million in assets. Gearhart employs about 5,000.

“It may take us a couple of years to prove what a good deal it is,” said Gearhart, who, until now has been prohibited by a federal court order from making major changes at Geosource.

The lengthy battle, which securities analysts say is apparently the longest and most expensive in U.S. business history, began in October, 1983, with Smith’s friendly purchase of a 3.64-million-share block of Gearhart stock for about $113 million. At the time, Marvin Gearhart said he welcomed Smith’s purchase, explaining that he looked forward to possible business combinations. But by March, as Smith began to buy more Gearhart shares, Gearhart said he asked Jerry Neely to stop buying the shares and Neely refused.

In mid-April, 1984, Gearhart accused the Newport Beach company of launching a “creeping merger” and filed suit in a Fort Worth federal court to stop Smith from buying any more Gearhart stock. Smith filed countersuits and the acrimonious battle was under way. Despite the controversy, about 6.6 million Gearhart shares had been tendered to Smith, which continued to extend its tender offer while negotiations continued.

Total Cash Settlement

Several settlements were discussed, including Gearhart’s giving Smith some assets, plus cash, according to one analyst. The analyst said Gearhart tried to sell the Smith block directly to a pension fund and others, but the months of discussions finally led to a total cash settlement, according to sources close to the negotiations.

Monday’s announcement was the ideal birthday present for Michael Brown, a Drexel Burnham mergers and acquisitions specialist, who as Gearhart’s chief negotiator spent thousands of hours on the deal, shuttling back and forth between Newport Beach and Fort Worth.

Brown, who celebrated his 44th birthday Monday at his Beverly Hills office, said, “I am tired, but happy.”