Unocal Win May Dampen Takeovers : Analysts Say Court Decision Creates New Defensive Weapon
The costly defeat of T. Boone Pickens Jr. in his quest to acquire Unocal has probably taken much of the punch out of the takeover wave that has swept over corporate America in recent years, experts agreed Tuesday.
At the very least, the settlement Monday of the Unocal-Pickens tussle will leave the Los Angeles-based parent of Union Oil of California saddled with slightly more than $4 billion in new debt and will probably keep Pickens out of the takeover arena for a while until he is able to sell all of his Unocal shares, analysts said.
But on a broader level, the multimillion-dollar loss that the Pickens-led investor group will probably suffer, coupled with a key Delaware Supreme Court ruling that prompted the settlement of the Unocal fight, could cause an abrupt waning of the merger mania. The court ruling was viewed as sanctioning “reverse greenmail,” a potent new weapon to ward off hostile takeover attempts.
“This is a major victory for the underdog, and the underdog, interestingly enough, is the shareholder,” said Suzanne Wright, a Denver-based energy industry analyst with First Boston. “This is the death of greenmail,” she said, referring to the tactic in which a corporate “raider” accumulates a large stake in a company and then sells the stock back to the firm at a premium.
But takeover expert Michael C. Jensen described as “ludicrous” Friday’s Delaware court ruling that Unocal need not include Pickens in its lucrative stock repurchase plan, because it allows corporate managers to pit stockholder groups against each other and to discriminate against some stockholders.
“It’s an incredible victory for Mr. (Fred L.) Hartley,” chairman of Unocal, said Jensen, who is a professor at Harvard Business School and the University of Rochester Graduate School of Management. “It’s a loss for all the rest of us.”
Unocal’s board Monday approved a settlement with Pickens’ Mesa Partners II investor group that allows the group to participate in the stock buy-back but to a lesser extent than other shareholders, hence the label “reverse greenmail.”
Unocal agreed to exchange 9.1 million of its 23.7 million shares for new senior secured notes worth $72 per share. But Mesa will return about $100 million in securities for 1.4 million Unocal shares, so that only 32.5% of Mesa’s holdings will be repurchased while 38.4% of other shareholders’ stock will be bought.
Mesa also entered a 25-year “standstill agreement” under which the group agreed to stay away from Unocal, to vote all shares it owns as Unocal directs and to sell its remaining 16 million Unocal shares only under certain circumstances. Mesa can sell its stock through limited brokerage transactions or can wait until after Dec. 31 and make a broader public offering.
The price that Unocal paid for its freedom was $4.16 billion in new debt. Fees to investment bankers will total $25 million, and legal fees will be less than $10 million, Unocal Assistant General Counsel Sam A. Snyder said.
The Pickens group stands to lose between $40 million and $80 million, depending on how much it can sell its remaining shares for and how high expenses from the fight are. The group accumulated its Unocal shares at an average price of $44.72. The shares closed Tuesday at $35.875, down a whopping $10.125 from Friday. It did not trade on Monday.
“The obvious winner was Unocal’s management because its strategies proved successful,” said M. Craig Schwerdt, an analyst with Morgan, Olmstead, Kennedy & Gardner in Los Angeles. “The obvious loser will be Boone Pickens, who didn’t accomplish his goals” and who lost money for the first time in six takeover attempts.
“It’s not so easy pickings this time,” Schwerdt said.
By its own reckoning, Mesa made about $598.5 million in pretax profits since 1982 in unsuccessful attempts to take over Cities Service, General American Oil, Superior Oil, Gulf Oil and Phillips Petroleum.
Schwerdt said the biggest losers were the owners of the 20 million Unocal shares that weren’t tendered to the stock repurchase offer and therefore aren’t eligible to receive the $72 per share worth of debt securities. “Those were probably the longest-term stockholders who had the stock salted away in a safe deposit box or were on vacation or were poorly advised,” he said.
Unocal’s Snyder said some shareholders didn’t tender because they “don’t want to do anything that will mean that they have to pay taxes.” Some of them were Unocal executives near retirement who decided it was better for estate planning purposes not to sell their stock.
Because of its new debt, Unocal will have to reduce its capital expenditures, which were originally expected to be $2.1 billion in 1985.
Snyder said “belts will have to be tightened” at the company. “We’re not crippled,” he said, but “it will be challenging for management to proceed.”
In April, when Unocal anticipated buying back only 50 million shares for a total of $3.6 billion in debt, Hartley said that the company would have to reduce capital expenditures by at least $250 million.
“That doesn’t mean because we’ve added on this $3.6 billion in debt we’re going to become a puny, weak company,” Hartley said. “We’re still going to be a strong company.”
Pickens’ defeat was brought about by the Delaware Supreme Court ruling, which experts said could have far-reaching effects because many major corporations are incorporated under Delaware law.
“This (Unocal) was a situation where they, in effect, wanted to pay a premium to their own shareholders,” Wright said. “This is a structural change, and I think it’s very important in future transactions.”
John C. Coffee Jr., a takeover specialist and law professor at Columbia Law School, said “a very screwy situation” will develop if the Delaware ruling is allowed to stand because companies could make certain offers available only to big financial institutions.
The Securities and Exchange Commission, which is reviewing the decision, probably “is not going to seek legislative action” to change the ruling, Coffee said. He predicted that, if the SEC takes action, it most likely will enact new rules rather than filing lawsuits.
Snyder noted that not every company involved in a hostile takeover attempt will be able to follow Unocal’s lead. If companies want to buy back stock by swapping it for debt, “the paper (debt securities) must be good,” meaning that the firm must have relatively low debt to begin with and management’s offer must be considered a good business judgment as measured by the Delaware court.
CHRONOLOGY OF THE FIGHT FOR UNOCAL October, 1984--Investor group led by Texas oilman T. Boone Pickens Jr. quietly begins to accumulate Unocal stock.
1. Feb. 14, 1985--Pickens group discloses that it has bought 7.9% of Unocal shares and says it may buy up to 15% “for investment purposes.”
Feb. 25--Unocal board adopts amendments to bylaws making it tougher for dissident shareholders to influence company affairs.
March 12--In first of many lawsuits, Unocal sues its longtime banker, Security Pacific, over loans made to the Pickens group.
March 27--Pickens group buys another 6.7 million Unocal shares, bringing stake to 13.6%.
2. March 28--Pickens group says it may seek to control or force a restructuring of Unocal and will solicit proxies to postpone the April 29 annual meeting for two months.
March 29--Unocal Chairman Fred L. Hartley says Unocal won’t postpone its annual meeting.
3. April 8--Pickens group launches $54-per-share tender offer for 64 million shares of Unocal to give it 50.1% of the company.
April 14--Unocal rejects the offer as “grossly inadequate.”
4. April 16--Unocal offers to exchange about half of its shares for new senior notes worth $72 per share--but only if Pickens is successful. Pickens denounces defensive measure as “just another poison pill in a new bottle.”
April 19--Unocal says its executive committee will recommend that directors place nearly half its proven domestic oil reserves into a limited partnership.
April 23--Unocal amends its exchange offer and will buy 50 million shares for $72 apiece whether or not Pickens’ offer is successful. Pickens recommends that shareholders tender to Unocal but vote with him to postpone the annual meeting.
April 26--Federal judge in Los Angeles orders Unocal to delay annual meeting until May 13 because of misleading statements made by both Unocal and Pickens group.
April 29--Delaware state court judge grants temporary restraining order prohibiting Unocal from excluding Pickens group from its exchange offer, saying all shareholders must be treated equally.
May 2--Delaware Supreme Court puts off appeal of Unocal ruling but notes that companies incorporated in that state “may deal selectively” with their shareholders.
May 13--Delaware lower court reaffirms ruling that Unocal must include Pickens in its stock buy- back. Pickens acknowledges that his group probably has lost key shareholder vote to block election of three Unocal directors and to postpone annual meeting.
May 15--Pickens says he met for two days with Unocal management to discuss a possible settlement.
5. May 17--Delaware Supreme Court rules that Unocal has legal right to exclude the Pickens group from its stock buy-back. Negotiations on settlement resume by telephone at Pickens’ request.
May 19--Settlement talks are elevated to face-to-face discussions.
6. May 20--Unocal directors approve settlement including purchase of 7.7 million shares held by Pickens group. Pickens acknowledges that his group could lose part of its investment.
7. May 21--Unocal stock drops $10.125 a share to close at $35.875.