Former Pickens Strategist Prepares for Solo Attacks

He was Marshall Ney to T. Boone Pickens’ Napoleon, the “financial genius” who set strategy for Mesa Limited Partnership’s raids on oil giants including Gulf Oil, Phillips Petroleum, Cities Service, Diamond Shamrock and Unocal.

David Batchelder, now ensconced in La Jolla and in the process of raising $50 million to $100 million for his own “boutique” investment banking firm called Batchelder & Partners, makes it clear he’s ready to lead his own corporate raids. And he served notice that he expects to be involved soon in his first major hostile takeover.

Among the investment “situations” he’s looking at is Santa Fe Southern Pacific Corp., which in recent months has fended off takeover bids by Henley Group and Olympia & York Developments. “All (Henley and Olympia & York) need to break the stalemate is one more activist player to accumulate enough stock,” he said.

Might Batchelder be that player? “Possibly,” he said, adding that he has yet to acquire any SFSP stock or contact Henley or O&Y; about joining forces in a takeover bid. Before leaving Pickens’ Amarillo, Tex.-based company this March after a 10-year stint, the 38-year-old Batchelder helped Mesa rack up $700 million in stock profits from its various targets. An accountant by training, Batchelder rose swiftly from assistant treasurer to controller to president of Mesa Petroleum, which was Mesa Limited Partnership’s predecessor company before Pickens rolled Mesa’s $1 billion in corporate assets into a master limited partnership in 1985.

“I don’t know anyone who’s better than David financially,” Pickens said of Batchelder on Monday. “He’s real astute, a good negotiator and a seasoned player. He’s a home run hitter and we hated to lose him.”

Although Mesa never successfully bagged any of the oil industry giants that it stalked, Batchelder helped Pickens, the so-called Learjet Cowboy, write corporate history, forcing Gulf Oil into the arms of Chevron in a $13.2-billion merger in 1984 that is still the largest U.S. acquisition ever.

“The Gulf merger was the direct fallout of the efforts of David’s group at Mesa. They surfaced the undervalued asset to the public, and said, ‘Here’s a sleeping giant whose value isn’t being maximized’,” said Michael Mulcahy, vice president and area manager of Wells Fargo Bank’s Dallas office, which helped Mesa finance several of its takeover bids.

As Pickens’ aide, Batchelder helped force the restructuring of the U.S. oil industry, which in the early 1980s was bloated in anticipation of ever-increasing oil prices. Raids by Pickens and others, combined with the downturn in oil prices, forced several large oil companies to restructure and streamline to increase returns to shareholders.

Restructuring Takes Toll

In the late 1970s, Mesa found itself in a bind similar to that of its targets, piling up debt to finance oil exploration while banking on increasing oil prices to recover its costs. In his 1987 autobiography, “Boone,” Pickens said he launched his round of takeovers after realizing that it was a cheaper way of replacing oil and gas reserves than through costly drilling operations.

While profitable for shareholders, the industry restructuring has taken a toll. In addition to taking on $4.5 billion in debt and selling $2 billion in assets, Phillips Petroleum reduced employment to 21,000 from 29,300 over a four-year period beginning in 1984 to evade the clutches of Pickens and raider Carl C. Icahn.

“We were restructuring the company long before Boone Pickens and Carl Icahn came along. Their actions forced us to speed up the process,” said Dan Harrison, a Phillips spokesman. The restructuring forced the early retirement of 1,600 employees. “I don’t think you would necessarily wish that situation on yourself,” Harrison said. “We would have a hard time saying (Pickens and Icahn) did a service to the industry.”

Batchelder is frequently referred to by investment types as a financial wizard capable of thinking quickly on his feet, a “broken field runner” in the takeover game, to use Mulcahy’s phrase. A prime example was how Batchelder helped devise a favorable tax treatment to salvage an $80-million after-tax gain from what initially looked like a $300-million loss on Mesa’s Unocal investment after a takeover bid failed in 1985.

Working with Drexel Burnham Lambert’s Michael Milken, Pickens and Batchelder helped legitimize “junk bond” financing to accomplish corporate takeovers. Mesa was ready to float a $500-million issue of junk bonds underwritten by Drexel to finance Mesa’s takeover bid before Gulf’s deal with Chevron was announced. The use of junk bonds, never before contemplated on that scale, has since become widespread.

First to Apply Concept

“This guy has a mind like a machine gun,” said Rosario “Sal” Ilacqua, an oil industry analyst at Nikko Securities who has followed Mesa for 20 years. “The two of them (Pickens and Batchelder) put their heads together and came up with all kinds of schemes.”

The Bartlesville, Okla., native also helped Pickens refine the concept of master limited partnerships, the “rolling up” of assets into a partnership to save investors double taxation, or corporate taxes in addition to personal taxes. When Mesa Petroleum became the Mesa Limited Partnership in 1985, the concept had never before been applied on that scale.

In 1979, Pickens had become the first to apply the royalty trust concept, forming the Mesa Royalty Trust in 1979, as means of returning a larger percentage of a business’s cash flow to investors.

Denying reports that his departure signaled a rift with Pickens or impatience with Mesa’s slower rate of takeovers, Batchelder said he and Pickens are on good terms and that he gave him a year’s notice of his intention to leave Mesa. According to Batchelder, his departure was occasioned by a desire for a change of scenery, to get away from isolated, often scorching Amarillo, a city he describes as a “sacrifice” to live in.

“I don’t see any particular advantage to living in a West Texas town,” said Batchelder, who before joining Mesa was a certified public accountant at Deloitte, Haskins & Sells’ Houston and Denver offices. He settled on La Jolla after vacationing in the area several times and deciding that was “a great place to live.”

Batchelder started his La Jolla “boutique” investment firm with the “$4 million to $5 million” he made at Mesa and is in the process of adding $50 million to $100 million that he is raising in a private offering. Batchelder & Partners will both advise investors for a fee and make investments on its own.

He makes no bones about wanting to get involved soon in hostile takeovers, or “unsolicited acquisition offers” as he calls them. Any negative connotation to making hostile bids has evaporated, he said, since the Oct. 19 stock market crash, which has left in its wake a mergers and acquisitions free-for-all in which “blue chip companies are going after blue chip companies.”

Mesa’s Raids Takeover attempts that David Batchelder participated in at Mesa Limited Partnership. Only Pioneer was acquired. Figures in millions.

Mesa’s Year Target Net Gain ’81 Cities Service $31.5 ’82 Gen. American Oil 43.6 ’82 Superior Oil 31.6 ’83 Gulf Oil 404 ’84 Phillips Petroleum 75 ’85 Unocal 83 ’86 Pioneer Corp. * ’86 KN Energy ** ’86 Diamond Shamrock 3 ’87 Boeing ** ’87 Singer *** ’87 Newmont Mining *** ’88 Homestake Mining ***

* $800 million acquisition.

** Unavailable *** Unresolved

Source: Batchelder & Partners