Security Pacific, Citibank, Swiss Bank, Mellon : Banks Under Pressure for Funding Raiders

When former Gulf Oil Chairman Jerry McAfee resigned from the Mellon Bank advisory board last December to protest Mellon’s financing of a corporate raid, he fired off a letter to the bank. “Some of us must have the courage to say no to these people,” he wrote, “and I believe the responsible banks of the country, including the Mellon, should be among those to do so.”

To McAfee’s delight, banks have begun doing just that. Security Pacific, Citibank, Swiss Bank and, most recently, Mellon have recently pulled out of a loan agreement with the object of McAfee’s ire, a corporate raider.

In this case, the takeover artist is T. Boone Pickens Jr., who was using the money from those banks to help finance his quest for Unocal and who also tried to take over Gulf and Phillips Petroleum, the company that received the Mellon loan that McAfee was protesting.

Pickens also has asserted in congressional testimony that none of the big New York or Chicago banks, many of which have lent money to him in the past, will make him a loan.

“A hell of a lot of banks in the States are getting nervous a la Security Pacific and Mellon,” said Harold H. Hammer, executive vice president of Gulf. “The sad thing from my point of view is that these guys have no trouble replacing them with overseas banks, particularly from Canada.

Pickens blames the nation’s corporate establishment for his increasing difficulty in rounding up banks. Big companies, he says, are putting pressure on the banks to cut him off.

There is evidence that he is right--in part.

Bankers, directors, businessmen and industry analysts familiar with the situation say banks are indeed under pressure from their own boards and from outside businessmen and community leaders to cut off the initial source of funding used by raiders to launch an attack on a company.

“All major banks are getting pressure from a lot of constituencies,” said an executive at one bank that has done business with Pickens. “We’re getting pressure from our local community and also from commercial and industrial customers, whether they’re in the community or not.”

But these sources, most of whom agreed to talk about this emotional issue only if guaranteed anonymity, said Mesa’s falling out of favor with banks isn’t completely attributable to pressure from big companies. (None of the other well-known takeover artists have complained of having difficulty lining up bank funds for their takeover bids.)

Behind the headlines of the pullouts, they say, is a convoluted tale of big banks juggling their desire to make money with their growing discomfort with the business practices of corporate raiders.

“Supporting a takeover generates important rewards, but high reward carries with it high risk,” noted Anthony M. Frank, chairman of First Nationwide Savings of San Francisco.

Banks say they also are shying away from Pickens because of Mesa’s transformation from a profitable oil and gas company to a takeover vehicle; growing reticence by some banks to participate in loan consortiums when they don’t know precisely how the funds will be used; apprehension about Unocal’s health and Pickens’ ability to control and run the company if he does take it over; and concern over Pickens’ record of never having walked away with the company of his choice.

The banks’ recent credit withdrawals, preceded by Unocal’s lawsuit against its longtime banker, Security Pacific, whose money also was being used by Mesa to buy Unocal stock, have stimulated debate over the propriety of banks’ involvement in hostile takeover attempts.

“If we’re serious in America about capital formation to spur industry growth, it’s an outrage that banks encourage corporate raiding by allowing 100% borrowing” for takeover attempts, Gulf’s Hammer said. “Banks are the very core of this problem.”

Hammer, who resigned in protest from the Mellon board the same day that McAfee did, said he hopes the Unocal suit against Security Pacific “will establish some policy guidelines” on bank financing of unfriendly takeovers.

“Management is demanding to know exactly what are their bank’s policies concerning unfriendly deals,” he said. “It’s a question that management deserves to have answered. If you don’t like the answer, change banks.”

Equally eloquent is the opposing argument.

“The Fred Hartleys are shouting, ‘Stop the T. Boone Pickenses of the world,’ and they have some banks listening,” said one banker who has done business with Pickens. “But I don’t think banks ought to be making public policy based on a few phone calls from big business.”

“We’re all paranoid,” one banker said. “Are banks supposed to be the policemen for corporate America? That’s clearly the signal we’re all getting.”

To some extent, banks began settling the issue themselves last year. James C. Van Horne, Giannini Professor of Finance at the Stanford Graduate School of Business, says there has been a noticeable retreat since early 1984 by major banks from financing leveraged buy-outs, both hostile and friendly.

“As a class, they are less eager to rush willy-nilly into any deal that comes along,” he said.

Moreover, some major banks--most notably, Bank of America, Chemical and Chase Manhattan--have longstanding policies of not financing hostile takeovers. Chemical has even begun calling its corporate customers to let them know where it stands on this issue.

Banks, for the most part, don’t favor this approach, however.

“A very troublesome aspect of trying to deal with this is that if you adopt such a policy, then you get into a credit-rationing role and we don’t believe in that,” said one executive of a bank that has lent money for hostile takeovers and is reviewing its policies.

Those who have lent money to Pickens in the past say they are concerned by what Mesa has become.

“Ten years ago, it was a pretty solid little energy company, so we were confident our loans were well secured,” said one banker. “But Mesa is no longer in the energy business, and that became a problem for us because the nature of the credit becomes completely different.”

The type of loan agreement to which they were bound also became a problem for Citibank, Security Pacific and Swiss Bank, all of which pulled out of a 12-bank lending consortium. The credit is secured by oil and gas properties, but the funds from that agreement are used “for general corporate purposes.” Some of that money has been used to buy Unocal stock.

“The loan was too blind,” said one banker. “We were uncomfortable with our lack of control over the nature of the investment.”

Bank analysts say such loans aren’t unusual. But because they can put banks in the awkward position of having their money used against another customer--which was the case with Security Pacific--some banks refuse to make them.

“We don’t do blind financing,” a spokesman for First Interstate Bank said. “We insist on knowing what the credit is going for and then, if they want to change their original intent, they have to get our approval first.”

Also troubling to some is Pickens’ inability so far to acquire any of his targets.

“Boone has parlayed what started out as a very good image into a reputation for doing deals but never taking one home,” said a corporate executive who admires Pickens. “His credibility is at stake here.”

Bankers who were willing to discuss the more sensitive issue of pressures from outside say the pressures are particularly troubling when their board includes an executive from the oil industry, Pickens’ target. Asked to explain why he wouldn’t lend money to Pickens, one bank executive said: “Look, we have the CEO of a major oil company on our board; there’s no way we could keep doing business with Pickens.”

Even a business executive who is a bank director acknowledges that pressures “of the phone variety” have intensified in recent months.

“Businessmen on bank boards aren’t pounding somebody on the head to stop these loans,” the executive said. “I can’t even say with any certainty that this matter is being brought up at board meetings. It hasn’t at ours. But yes, a lot of us are making phone calls.”

Sources familiar with Security Pacific’s decision to drop out of its credit agreement with Mesa say that all of these factors were at play.

The bank, which had done business with Unocal for 40 years and with Mesa for over a decade, had become increasingly uncomfortable with Mesa’s transformation into a takeover vehicle and realized, by a process of elimination, that many of the remaining oil and gas targets were Security Pacific clients.

It first told Mesa of its “discomfort” with continuing the loan “on a blind basis” in mid-December. In January, when the 12 banks in the Mesa consortium were asked to reapprove certain terms of the agreement, Security, along with Citibank and Swiss Bank, declined to sign the document. But a majority of the banks did sign, so the agreement was continued.

By then, rumors were circulating that Mesa’s next target might be Unocal, and sources say there were discussions between the bank and Unocal and “clear signals” from Unocal that it would take its business elsewhere if Security continued to do business with Mesa.

In February, when Mesa made its first SEC disclosure that it was buying Unocal stock, Security began looking for other banks to try to sublet its Mesa loan. And about the same time, several sources said in separate accounts, Security Chairman Richard J. Flamson told Unocal that, as soon as it learned conclusively that its money was being used to buy Unocal stock, it began pulling out of the agreement. Security also sent a letter to Mesa to that effect in early March.

On March 12, Unocal sued Security and, in a letter to Federal Reserve Chairman Paul A. Volcker, urged the Fed to curb the “abusive use of credit” that is fueling hostile takeovers.

Security subsequently did complete the process of withdrawing from the agreement. Mesa then sued Unocal, alleging coercion.

The suit against Security is still pending, and key bank executives are said to be “of two minds” on whether to countersue.