The Deal: How Getty Ended Up With Texaco

Times Staff Writer

BACKGROUND OF A BATTLE In the two months since a Houston jury returned an $11.1-billion verdict against Texaco in a lawsuit brought by Pennzoil, many have wondered just what the panel heard during 17 weeks of trial to persuade it that Texaco's alleged interference in Pennzoil's planned takeover of Getty Oil warranted such damages.

In a search for answers, Times Staff Writer Debra Whitefield reviewed the trial transcript--all 25,445 pages--plus various depositions, trial briefs, exhibits and motions. She also conducted interviews with lawyers, jurors and the judge.

The two stories below are a reconstruction of how, through a complex series of events, Getty Oil came to be acquired by Texaco and of how Texaco apparently fumbled in defending itself against the Pennzoil lawsuit.

J. Hugh Liedtke had been watching with growing fascination as the power plays at Getty Oil escalated into full-scale war.

But when the Pennzoil chairman read an account of Gordon Getty's retaliation for shabby treatment by Getty Oil's board a few weeks earlier, his fascination gave way to business interest. "In that mess," he thought, might be an opportunity for Pennzoil.

Liedtke commissioned a confidential study. At $100 or $110 a share, he wanted to know, could Pennzoil swing a partial purchase of Getty? And was the Los Angeles-based oil company--whose stock was then trading around $80 a share--worth that much?

Pennzoil would get a bargain, the word came back, even at $120 a share, and the deal was "doable" for even more. Liedtke, alarmed at his staff's enterprise, ordered the $120 evaluation destroyed. "I don't want any $120 walking around," he told Senior Vice President Clifton H. Fridge.

Armed with his staff's reports, Liedtke got his board's permission on Dec. 19, 1983, to buy up to 48% of Getty's stock. At last, he thought, a chance for medium-sized Pennzoil to take a "giant step forward" into the oil industry's big time.

'Christmas Surprise'

Eight days later, he made his move. Not knowing whether the feuding Getty directors would view Pennzoil as a threat or a blessing, Liedtke chose an approach that Texaco lawyers would later call "The Christmas Surprise."

Pennzoil bought 590,000 shares of Getty Oil's stock on the open market. Then late in the day on Tuesday, Dec. 27, it launched a tender offer to raise its holdings to 20%. Its price: $100 a share.

But as Liedtke testified later, "we were after assets," not stock.

Getty's assets were an oilman's dream. A 2.3-billion-barrel stockpile of proven oil reserves, most of them in California's prized Kern River Field near Bakersfield.

But to get at those assets, Pennzoil needed to strike a deal for a lot more than 20% of the Getty stock. So, Pennzoil director William Wilson, U.S. ambassador to the Vatican, agreed to contact Getty Oil's two largest stockholders--Malibu's J. Paul Getty Museum and the Sarah C. Getty Trust, which held stock for the Getty family members. Between them, they controlled 52% of Getty Oil.

Majority control of a major public corporation by two shareholders is an anomaly in American business. One more bizarre twist in this case. And an important fact as the story unfolded.

Agreed to Talk

Wilson reached Gordon Getty at his home in San Francisco on Dec. 28 and paved the way for Liedtke to call. "We want to work with you," Liedtke said. Getty made no promises, except to talk to museum President Harold Williams.

Liedtke also talked that day to Getty Oil director Harold Stuart, who called to say he was "delighted about the offer."

Not everyone shared that enthusiasm.

Barton J. Winokur--an outside lawyer for Getty Oil, who Pennzoil would later dub Backdoor Bart for his role in the Getty board decision to join a lawsuit seeking to hamstring Gordon Getty--arranged a conference call with other Getty Oil advisers and company Chairman Sidney R. Petersen as soon as he heard the news. All agreed that it was a bad offer and had to be blocked.

The price, they reasoned, was at least $20 a share too low. But there was a bigger threat. If Pennzoil drew in 20% or 30% of the outstanding stock, as seemed likely, the Houston company could join forces with Gordon Getty. Together, they could "operate the company any way they wanted for their own benefit and perhaps even squeeze out the minority," Winokur said later.

When Winokur reached Getty Museum adviser Martin Lipton later that night, Lipton's reaction was the same. It had to be stopped. But how?

Problem With Approach

In meetings the next day, the advisers kept returning to the same answer: A self-tender by the company for most of its outstanding shares. There was just one problem with that approach: Gordon Getty.

With far fewer shares in the marketplace, the trust he oversaw would own a majority of Getty Oil's stock. And given the bitterness stirred up by months of fighting between him, the museum and Getty executives over the oil company's direction, it was a good guess that he might retaliate if he had majority control. For this plan to work, all three Getty interests had to come to an understanding.

The advisers needn't have worried. For overnight, Williams announced that he was fed up with the constant disputes and wanted to get back to running a museum. He would sell his shares for any price over $100.

That left the company and Gordon Getty. And both already knew they couldn't agree on how to run a business. With the museum out of the picture as mediator, the advisers turned to Plan Two. Defeat the tender offer, buy time and sell the entire company on their own terms: for at least $120 a share.

Agreed to Meet

On Friday of that week, Gordon Getty flew to New York, where he met with his investment banker, Kidder Peabody Vice President Martin Siegal. Rather than a threat, Siegal viewed this as a "a very helpful and promising development." By the end of the day, Gordon Getty had agreed to meet Liedtke.

When word of the planned meeting reached Pennzoil's outside financial advisers, they started suggesting a structure for the meeting.

"Like hell," the beefy chief executive bellowed. "I deal with Mr. Getty directly."

Saturday was New Year's Eve. After meeting all day, the Getty Oil advisers finished drafting an agreement at about 10 p.m. The company would tender for its own stock at $115 or $120 a share as a stalling tactic until it could find someone willing to pay more than $110 for all of the company's 80 million shares. They figured that it would take 90 days.

Liedtke brought in the new year on a plane from Houston to New York. Once there, he "waded through the broken glass on Times Square" to reach his room at the Waldorf Astoria Hotel and went to bed.

Sunday's 4 p.m. meeting with Gordon Getty was critical for Liedtke's cause. As of Saturday night, Gordon Getty remained unconvinced that an agreement with Pennzoil was his best option.

But minutes after the two began talking in Gordon Getty's suite at New York's elegant Pierre Hotel, it was obvious to everyone there that Liedtke was charming Getty. He regaled the son of the oil magnate with tales of how his father had attended Liedtke's wedding and had hand picked Liedtke to run one of his investments, the predecessor to Pennzoil, South Penn Oil Co. Within a year, Liedtke had revived the sickly company and overseen the doubling of its stock price, whereupon J. Paul Getty sold his 9.9% interest to Pennzoil.

'Pretty Smooth' Fellow

"This fellow (Liedtke) is pretty smooth," Siegal later recalled thinking. "He is very much doing a nice job of making Mr. Getty feel at home."

In less than two hours, the two men struck a deal. Together, they would take Getty Oil private, reorganize it and dump the existing board, an overthrow Gordon Getty had tried to orchestrate on his own almost three months earlier. Gordon Getty would be chairman, own 57% of the stock and control a like percentage of the board. Pennzoil would control the rest. And Liedtke would run the company as chief executive.

If the arrangement didn't work out after a year, they would split the assets 57% to 43% and part company--in other words, they planned to "haul part of it off," Texaco lawyer Richard B. Miller would say later.

They could foresee only one problem. For this to work, they had to buy all of the other shares, including the Getty Museum's. With its endowment of 11.8% of Getty Oil's stock, the museum was the company's second-largest shareholder. And with its shares and Gordon Getty's, Pennzoil had the deal sewed up.

Williams had already said he wanted to sell. But would he sell to Pennzoil or Gordon Getty? And at what price? After some haggling, Liedtke agreed to Gordon Getty's price: $110, which banker Siegal proclaimed fair.

Delighted by Prospect

Gordon Getty, a connoisseur of opera and anthropology who was never taken seriously by either his father or the management and directors of Getty Oil, saw at long last a chance to play a serious role in the family business. The prospect so delighted him that he readily agreed to something highly unusual.

He would sign a letter reflecting his conversation with Liedtke, pledging his support of Pennzoil's offer and promising to seek the board's ouster if it didn't accept the plan. The letter would come back to haunt him.

Liedtke and Getty shook hands and the Pennzoil team left to get the paper work started. Siegal's task was to visit Martin Lipton, a leading takeover lawyer and adviser to the museum.

Their apprehensions about the museum were justified. That same day, Jay Higgins, a Solomon Bros. takeover specialist retained by the Getty Museum, called Texaco President Alfred C. DeCrane Jr. The museum wanted to sell its shares. Was Texaco interested?

DeCrane was intrigued, but disenchanted with the idea of owning only 11% of a company whose major shareholder held 40%. He promised to think about it.

Nor was Siegal having much luck with Lipton, who was throwing a party at his apartment and trying to deal with Siegal at the same time. Lipton was concerned that Pennzoil and Gordon Getty would gain control and either leave the museum and the minority shareholders with no say in the company's affairs or buy them out with worthless securities. But he refused to even consider having the museum sign Gordon Getty's letter to Liedtke.

Time Running Out

Time was running out. Getty Oil had scheduled a board meeting for 6 p.m. Monday to consider the tender offer. And Pennzoil wanted its new offer, signed by the two key shareholders, ready by then. A Pennzoil lawyer would work through the night to finish it, but would the museum sign?

Clearly, the museum was a wild card.

Getty Oil had its own problems that Monday. Its advisers learned that afternoon that Gordon Getty had backed out of his commitment to sign the agreement they had worked all day Saturday preparing.

So they tried a different approach. They called Pennzoil.

Liedtke wouldn't talk to the company advisers, although his investment banker did. But after hearing the advisers' pitch for the two oil companies to negotiate the sale of some Getty assets to Pennzoil, the banker said he saw no purpose in talking.

Lipton, meanwhile, had received Pennzoil's draft agreement for taking Getty Oil private and ordered some changes. He and museum chief Williams had already decided that they would sign the Pennzoil plan--but only to get it before the board. If the board approved it, so would the museum.

Lipton demanded a change in the heading, to "Memorandum of Agreement," to indicate, he said later, that in his view it wasn't an agreement at all. And he insisted that it be amended to expire if the board didn't approve it at the Jan. 2 meeting.

Presented to Board

Pennzoil's lawyers quickly made the changes, rushed it to Gordon Getty for his signature and dashed over to the Hotel Intercontinental, where the board was already meeting. Lipton took it to the board room, where Williams signed it and presented it to the board.

As many as 40 people crammed into the small room at times. There was repeated finger-pointing at Gordon Getty for getting them into this jam. And tempers often flared as the directors grappled with their dilemma. If they accepted the only offer on the table, they could be accused of accepting a low-ball offer and be sued. And if they didn't, what was to stop Pennzoil from buying enough stock to join with Gordon Getty and take control?

After unanimously rejecting Pennzoil's $100 tender offer as "grossly inadequate," the Getty Oil board turned its attention to the second Pennzoil plan, which Williams called "a reasonable approach" and one the museum was "prepared to support."

His comments did little to quell the protests and anxieties. The directors strenuously objected to being forced into making a complex, multibillion-dollar decision in so little time and on a take-it-or-leave-it basis.

And there was clear consternation over the price, $110 a share, which Getty Oil's investment banker, Geoffrey Boisi of Goldman Sachs, called inadequate. Gordon Getty, several noted, appeared to hold the same view since he was more interested in having the company's assets than $110 a share.

Couldn't Afford More

But could Pennzoil afford more than $110 a share? No, Boisi said, pulling out a dossier on "Plutus," Goldman's code name for Pennzoil. That, he said, is Pennzoil's financial limit.

Pennzoil was giving Getty Oil a "bear hug," he said--using speed and pressure to get a good deal for itself.

Instead of accepting the Pennzoil offer, Boisi offered, why not let Goldman market the company aggressively and try to fetch a higher price? And while the search was on--he figured it would take 90 days--why not authorize the company to make a self tender offer for all but Gordon Getty's shares at $120 a share, thereby blocking the Pennzoil tender offer.

(There is no record in the typewritten minutes of that meeting that Boisi ever received permission from the board to shop around for a higher bid.

(In fact, the chairman at one point noted that the company had lived up to its pledge under the signed truce with Gordon Getty and the museum "and had not shopped the company." But shop Boisi did--and aggressively--beginning, he says, at 7:45 a.m. the next day. For that alone, he later came under sharp attack by the jury, which regarded his behavior as shameless. As for the handwritten notes of that meeting, they were destroyed shortly after Texaco bought Getty Oil, further ammunition for Pennzoil during the trial.)

After more than three hours of sometimes heated arguments, the board rejected 10-5 Pennzoil's so-called Memorandum of Agreement. Having reached an apparent impasse, the board recessed for two hours. And when they returned, some had a fresh idea.

Seek an Increase

Why not ask the trust and Pennzoil to raise their offer by $10 "in some form" so Goldman Sachs could pronounce it fair for shareholders and the board could "go forward with a transaction with Pennzoil?" director Lawrence A. Tisch asked.

If Pennzoil would agree to such a plan within 48 hours, added Chairman Petersen, the board "would commit the company to the transaction." And if it didn't, the company would instead proceed with a self tender for 25 million shares at $120 each.

Was that, as Lipton would insist later, only a floor to begin price talks and certainly not a counterproposal to Pennzoil's Memorandum of Agreement, which he says died when it was rejected the first time? Or was the Pennzoil offer still alive?

That is what the court case ended up turning on, and the jurors decided the memorandum survived and the two sides eventually were bound to it.

Eleven directors favored approaching Pennzoil with the plan. (An actual vote wasn't taken because Petersen didn't think he could get the support of 14, a requirement that Gordon Getty and Williams wrote into the company bylaws in retaliation for the directors joining the lawsuit to hamstring the trustee.)

And during a short recess soon after, one of them did. "Arthur, get your client to go up the extra $10 and we can close the deal tonight," Pennzoil's chief negotiator, lawyer Arthur Liman, testified he was told by director Tisch. "It doesn't have to be $10 in cash. It can be a subordinated debt."

Only Issue Was Price

"They said that there were no problems with anything else, that the only issue was the price," Liman says Lipton told him.

Back in the board room, this time without the advisers, the directors were agitated. What they really wanted was an auction and a self tender, they said. But by holding out for the Pennzoil offer, Gordon Getty was blocking them.

After several heated exchanges, Harold C. Stuart finally asked Gordon Getty pointedly: Do you have any agreement or other arrangements with Pennzoil that the board doesn't know about? Gordon Getty said he would have to talk to his advisers.

A few minutes later, when the advisers had rejoined the meeting, Stuart pressed him again. This time, Getty's lawyer, C. B. Cohler, responded by reading what has come to be called the "Dear Hugh" letter.

The reaction isn't recorded in the minutes. But by all accounts, the directors were livid. Gordon Getty had, after all, promised in that letter to seek their ouster if they didn't approve the offer.

"I was absolutely outraged. I still am," director Henry Wendt testified last October. "I saw it as an act to sell the other shareholders down the river."

Once the furor died down, Lipton advised the board that Liman had agreed to present what the board minutes call an "alternate proposal" to Pennzoil--but only if the board approved it. As he outlined the deal with Liman, Pennzoil would withdraw its tender offer and buy out all shareholders except the trust at $110 a share plus a debenture with a $10 face value--a deal that Boisi called fair to shareholders.

Important Question

What about the other provisions of Pennzoil's Memorandum of Agreement, would they still apply? Stuart asked. If answered, his question might have forestalled Pennzoil's lawsuit. Instead, the only recorded reply was Lipton's: "Who cares?"

After approving the latest proposal, 14-1, the board recessed for the night, at 2:30 a.m., and Liman paid Liedtke a visit.

"Outrageous," Liedtke raged upon hearing the proposed terms, which were put in writing and slipped under a Pennzoil lawyer's door four hours later.

Liedtke would have been far more outraged had he known that Boisi, the Getty investment banker, was on the phone five hours after the board meeting broke up--looking for other buyers. By the time he returned to the Intercontinental, 30 minutes late because he was still trying to drum up interest in Getty Oil, he had expressions of interest from Texaco and Chevron, to name a few.

Chevron seemed the most interested, he would say later. But Texaco asked him to keep it posted.

Liedtke, meanwhile, was still angry when Liman approached him Tuesday morning. He lit into hotshot New York banking firms who he was convinced were trying to cheat him, and complained bitterly about being forced to bid against himself when there were no other offers on the table.

Pennzoil had expected a counteroffer, but on "optics"--technical matters--not a demand for more money.

Proposed Compromise

Liman proposed a compromise. Since the dispute now revolved around the value of one Getty Oil property--a reinsurance company that Goldman Sachs valued at $1.5 billion and Siegal valued at $1 billion--why not offer them $110 plus a guarantee that if the property sells for more than $1 billion after taxes, shareholders get the proceeds?

Eventually, Liedtke agreed--both to that and to a guaranteed minimum deferred payment of $3 a share. But Lipton wanted more. Get him up to $5, he advised Liman just a few minutes before the meeting was to reconvene.

Liman knew that Liedtke was already upset. So he went out on a limb. If Lipton could deliver a firm deal, Liman would get the $5. Lipton made a note to himself to that effect and went into the board room.

The "Pennzoil proposal"--whose current value was estimated at $112.50--was approved by the board after both Lipton and Siegal said their clients would accept it. Once again, director Chauncey Medberry was the lone dissenter.

Then, in a move that Pennzoil would later say bolstered its argument that the deal was binding, the board unanimously agreed to indemnify the chairman, president and general counsel against their actions during the previous 18 months. It also authorized so-called "golden parachute" contracts to protect nine company executives if they were let go after the merger.

Agreed to Change

Lipton delivered the word to Liman, who called Liedtke. "No problem," he said of the counterproposal, the indemnity and the golden parachutes. "You can tell them yes."

The board, after hearing Liedtke's response, adjourned the 25-hour meeting with no further comment.

"Congratulations, Arthur, you got a deal," Liman testified Siegal told him when the meeting broke up. Liman, all smiles, asked Siegal if it would be OK if he went into the room and shook hands with some of the directors.

Liman did that, he said, although no one will admit to having shaken his hand.

Liedtke then called Gordon Getty's suite to congratulate him. Gordon Getty wasn't home, but his wife Ann told Liedtke she had just heard the news and was "delighted." Won't you join us, she asked, in uncorking a bottle of champagne to celebrate?

Liedtke says he asked for a rain check. He was already late for a celebration he was hosting for the Pennzoil team.

As it turned out, the celebrations were premature. While the Pennzoil advisers started preparing a definitive agreement, Boisi was back on the phone at 8 a.m. Wednesday, Jan. 4, making what he termed "courtesy calls" to Texaco and others he had called the day before. The "agreement in principle" the two sides had issued the night before, he told DeCrane, was nothing more than a "comment on the price" where negotiations with Pennzoil would begin. There was no binding contract.

Ordered More Meetings

Texaco executives had started reviewing public documents of Getty Oil the previous morning after DeCrane spoke with Boisi. And once assured by the deal maker that the agreement with Pennzoil was not a binding contract and that all the Getty interests would still welcome a Texaco offer, DeCrane ordered still more meetings and reviews.

Around noon, Texaco Chairman John McKinley flew back from Alabama, where he had been vacationing. At 9 p.m., First Boston was retained as Texaco's investment banker. And from 10 p.m. until nearly 4 a.m. the next day, the Texaco executives and their advisers huddled to discuss a merger.

The Pennzoil operatives, meantime, were struggling over the definitive agreement. They had run into a serious tax snag that could saddle Getty Oil with a $2-billion tax bill. And word had reached New York that a California court had issued a restraining order blocking Gordon Getty from signing the agreement.

Both sides also had started pointing fingers at the other for their slow progress.

By early Thursday, Jan. 5, Boisi had drummed up interest from five companies. Texaco and Chevron were interested in the entire company. The Saudi Arabian government toyed with buying a 60% stake. Shell was interested in some Kern assets and General Electric was looking at the reinsurance company.

Only Texaco was putting together a deal. Around noon, Lipton took a call from McKinley. The Texaco chairman wanted further assurance that the Gettys were free to deal and an opportunity to be heard before the museum signed with Pennzoil. Lipton told him a definitive agreement with Pennzoil wasn't likely that day.

That afternoon, Lipton notified Siegal of Texaco's interest and instructed his associate assigned to the Pennzoil case not to go to a Pennzoil meeting scheduled for that night. "I needed her with me," he would say later.

Authorized to Negotiate

Later that day, Texaco's board authorized management to negotiate for the acquisition of Getty Oil for as much as $125 a share, and the Texaco executives and tacticians headed for Manhattan for meetings with Lipton and Gordon Getty.

Lipton promptly handed them a list of "absolute necessities" for any deal with the museum. For the "psyche of my client," he demanded an indemnity to protect Williams against lawsuits filed in connection with the bizarre events of the preceding 18 months. And in the event the deal should fall through, he would insist on receiving at least $112.50 a share for the museum's stock--the price Pennzoil had agreed to pay.

He also insisted on knowing Texaco's price. When Texaco executives wouldn't indulge him, "he was furious" and "gave us some theatrics," Texaco counsel William C. Weitzel Jr. recalled later. Texaco wanted to talk to Gordon Getty first.

The meeting with Lipton broke up about 8:30 p.m. And at 9 p.m., McKinley was meeting with Gordon Getty at the Pierre. He broke the ice by telling him about Texaco's sponsorship of the Metropolitan Opera's radio broadcasts and then got down to business.

McKinley asked whether Gordon Getty would like to receive an offer from Texaco, noting that Texaco doesn't do unfriendly merger deals. Gordon Getty said he would welcome an offer but couldn't sign any agreements just then because of the restraining order in California, where a trust beneficiary had sued to block the Pennzoil deal.

Around 10 p.m., the two sides broke into two groups. Texaco departed to the hotel lobby, where it talked price. Weitzel, observing that Gordon Getty struck him as a genteel man who wasn't the type to haggle over price, recommended that Texaco give him their highest offer right off. He suggested $125 a share.

Minutes later, Lipton walked into the hotel, waved and went up to Gordon Getty's suite. Within 30 minutes, he returned to escort the Texaco operatives back upstairs.

Rejected Price Bid

Do you have your price ready? Lipton asked. McKinley replied that he was thinking $122. "That just won't do it," Lipton retorted.

So when they arrived in Gordon Getty's suite around midnight, no one but McKinley knew what price he was going to bid.

"I was thinking about $122," McKinley began. "But I have gotten indications here that there is another price that would be more agreeable to you. And so I am prepared to offer . . . "

"I accept!" the Getty heir burst out before McKinley could finish. "Oh, you are supposed to give the price first."

The tension broken, McKinley verified what Gordon Getty by then knew. "Yes, I am prepared to go to $125."

"Fine, fine," Gordon Getty replied. "Thanks. I accept. Thank you."

From that moment on, the deal was more or less locked up.

Gordon Getty signed what has become known as his "I regret" letter, in which he explains that he would sell if the court would lift its order. Lipton got his guaranteed minimum price and his indemnities--although not before Texaco executives "went back and forth" with him on why he was pushing so hard for indemnification. And the deal makers worked through the night, hammering out a definitive agreement.

By the next morning, only three days after Boisi set off on his shopping spree, the deal was done.

Pennzoil, which had been kept in the dark about Getty's negotiations with Texaco, hadn't even completed the paper work on the makings of its deal when it started collecting papers for the unraveling.

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