Smith International, Citing Hughes Suit, Files for Chapter 11 Protection
Smith International, one of the world’s largest oil services companies, on Friday filed for bankruptcy protection just three weeks after being ordered to pay its largest competitor more than $200 million to settle a patent infringement lawsuit.
The filing under Chapter 11 of the U.S. Bankruptcy Code gives the Newport Beach company, which has lost more than $221 million in the last three years, some much-needed breathing room while it sorts out its troubled finances and determines how it will pay the huge lawsuit settlement to Hughes Tool.
Perhaps the single largest effect of Smith’s bankruptcy maneuver is that it will force Hughes to wait months, possibly years, to receive its settlement payment.
“The net effect is that the filing puts an immediate roadblock in Hughes’ efforts to collect the settlement,” explained David Toy, a Los Angeles attorney who represented Hughes during the lawsuit.
Force to Bargaining Table
William A. Kistler, Hughes Tool’s president and chief executive, said that, while he was “very disappointed” by Smith’s filing, his company was “prepared to work under these kinds of conditions.” However, Kistler declined to outline Hughes’ contingency plans.
Some analysts said the move would force Hughes to the bargaining table to settle the damage award.
Friday’s filing came less than 24 hours after Judge Harry L. Hupp released a 65-page rough draft of his order spelling out the extent of damages that Hughes is entitled to collect because Smith infringed on its patent for a rubber seal used in oil drilling bits.
Attorneys, who were still calculating the exact damage award late Friday, estimated that the final settlement would be between $202 million and $205 million.
Hupp’s action Thursday afternoon signaled that he was ready to enter a final judgment against Smith. The final ruling would have thrown Smith into default on its $260 million of bank loans and hindered its ability to manage its operations because it would have made the settlement to Hughes immediately payable.
Trading Halted
Ron Trost, Smith’s bankruptcy attorney from the Los Angeles firm of Sidley & Austin, confirmed that Hupp’s pending ruling prompted the bankruptcy filing. “We couldn’t pay a $200-million judgment today,” he said.
Trading in Smith stock was halted by officials of the New York Stock Exchange just after noon Eastern time as news of the bankruptcy action was disseminated. The issue had lost just 25 cents a share on light volume before trading was halted. But after trading resumed at about 3 p.m. EST, Smith’s shares fell to $1.875 a share, down 87.5 cents for the day.
In a prepared statement, Jerry W. Neely, Smith’s chairman and chief executive, admitted that the company “initiated the bankruptcy proceedings in order to bring its assets and operations under the protection of the bankruptcy court while it reorganizes its financial affairs.”
While the Chapter 11 filing suspends payment of the award and any attempts by Hughes to collect it, Trost said it does not rule out the possibility of an appeal of the award, which capped a bitter 14-year battle between the two rivals and is believed to be among the largest in any U.S. patent infringement case.
The bankruptcy petition surprised few who had been watching the company. Some analysts had predicted the move since Hupp’s initial ruling Feb. 14. Others welcomed it as a wise maneuver to buy time before Smith has to settle with Hughes.
“This provides for an orderly settlement of affairs,” said Philip Meyer, an analyst with Eberstadt Fleming Inc. in New York. “This company is not going out of business. It is going to survive.”
The company’s bankruptcy petition listed assets as of Dec. 31, 1985, of $671.3 million and liabilities of $483.9 million.
Although its assets outweigh its debts, Smith would be forced to liquidate a substantial part of its holdings in order to pay its huge debt to Hughes Tool.
In addition to Hughes, Smith’s filing listed its 10 largest creditors as First Fidelity Bank in Newark, N.J., $77.4 million; Chase Manhattan Bank in New York, $58.2 million; Security Pacific National Bank in Los Angeles, $27.4 million; Midland Bank of London, $25.5 million; Bank of America, $19.1 million; Morgan Guaranty Trust of New York, $15.1 million; Amsterdam-Rotterdam Bank, $13.6 million; Royal Bank of Scotland, $12.3 million; Aetna Life & Casualty Insurance, $10.8 million, and Banque National de Paris, $10.3 million.
Foreign Units Excluded
The bankruptcy action, which allows Smith to conduct business as usual while it works out a repayment schedule, does not cover its foreign subsidiaries, which accounted for about 26% of the company’s total sales of $746 million in 1984, the last year for which sales figures are available.
According to Smith’s filing with the court, the board of directors voted on Feb. 24 in favor of Chapter 11 after discussions with the company’s 20 largest creditors, many of whom supported the action. Loren Carroll, Smith’s chief financial officer, said in a sworn statement: “I received the impression . . . that some of our banks were considering the filing of an involuntary Chapter 11 petition . . . to prevent Hughes and other creditors from obtaining liens.”
A normal part of any bankruptcy reorganization is the formation of a creditors’ committee to help oversee the company’s operations. However, in this case analysts and insiders wondered whether Hughes, even though it is Smith’s largest creditor, will be included on the committee because the two firms are business competitors.
Allowing a Hughes representative on the committee, noted one insider, would give the company access to business secrets and plans that could ultimately ruin Smith.
“We haven’t addressed whether we should be on the committee,” Hughes attorney Toy said. “It certainly would be an unusual committee arrangement if we were.”
