History’s Biggest Merger: Du Pont-Conoco

Du Pont springs a surprise $7 billion offer for resource-rich Conoco

While most Americans were enjoying fun and fireworks on the Fourth of July weekend, teams of executives from Conoco Inc. and Du Pont and Co. had forsaken friends and family to work almost round the clock on the biggest merger in U.S. corporate history. Du Pont, the largest U.S. producer of chemicals, had secretly offered to buy Conoco, the ninth biggest American oil company. After five hectic days of staff work, the deal seemed set. On Sunday night of the July Fourth weekend, Du Pont Chairman Edward Jefferson flew from his headquarters in Wilmington, Del., aboard a King Air twin-engine turboprop to Stamford, Conn., for a midnight meeting with Conoco Chairman Ralph Bailey in that company’s boardroom rotunda. Just after 1 a.m. the two weary, rumpled chief executives settled final details, sealed the agreement with a handshake and retired to Bailey’s office for a round of Scotch and bourbon. Du Pont was paying some $7 billion in cash and stock for Conoco. The union could form the seventh largest industrial enterprise in the U.S., ranking just behind the Ford Motor Co.

That marriage, however, is not totally certain. The deal still has to be accepted by stockholders of both Du Pont and Conoco. For two months a flock of suitors had fought over Conoco in a bidding battle as frenzied as an auction for a newly discovered Rembrandt. The other most serious contenders: cash-laden Seagram Co. of Canada, the world’s largest liquor distiller, and Texaco, the third biggest U.S. oil firm.

The fierce competition for Conoco is only the latest manifestation of the merger mania that is sweeping the U.S. This year alone, seven deals each worth $2 billion or more have been started or completed. Like baseball club owners plucking off free agents, corporate captains are choosing up sides in a wild scramble that could bring significant shifts in the balance of power throughout U.S. industry. The Reagan Administration seems to be encouraging the merger makers, and Attorney General William French Smith proclaims, “Bigness does not necessarily mean badness.”

The Conoco-Du Pont agreement was the climax of a complex drama of high finance. It began with unwelcome assaults on Conoco by two Canadian companies. The first came in May, when Dome Petroleum bought 20% of Conoco’s stock. The U.S. company fended off that threat by agreeing to trade its majority interest in the Hudson’s Bay Oil and Gas Co. in return for the Conoco stock that Dome had acquired. At the same time, however, a more ominous Canadian challenger appeared. In late May, Seagram privately approached Conoco with an offer to buy 35% of the oil firm’s shares. Edgar Bronfman, Seagram’s adroit chairman, is currently on the hunt for new acquisitions with nearly $3 billion, gained largely from the sale of Texas oil and gas properties.

But Conoco’s executives saw no way that a large oil concern could be rationally integrated into a liquor company. They also feared that Seagram would bring in new management. Around the oil firm’s headquarters, employees bitterly joked that the motto of a combined Seagram-Conoco enterprise would be “Drink and Drive.” Chairman Bailey quickly searched for an alternative merger partner, or so-called white knight, to thwart Seagram’s plans. His first choice was Tulsa-based Cities Service, an oil company less than half Conoco’s size but with exploration rights to 10 million U.S. acres. Readily agreeing to talk, Cities Service President Charles Waidelich met with Bailey at New York City’s Waldorf-Astoria hotel to draw up a merger plan.

A Bailey was bargaining with Cities Service, he and eight other top Conoco officers deftly moved to protect at least themselves in the merger game. Conoco’s board of directors gave them new employment agreements that guaranteed the payment of their salaries at least through mid-1984. Bailey’s own arrangement called for annual pay of $637,716 until 1989. Observed one cynical Conoco employee: “They equipped themselves with golden parachutes.” The company also lined up $3 billion in stand-by bank credit. Conoco executives intended to buy back a large chunk of company stock from the shareholders, if necessary, to block a hostile takeover.

On June 24, the day before the Conoco-Cities Service merger was to be announced, the phone rang in Bailey’s office. The caller: Du Font’s Jefferson. His question: “Is there any constructive role we can play?” Bailey thanked Jefferson for his concern about the Seagram bid, but replied that he was already negotiating with another company.

The Conoco-Cities Service deal, however, collapsed the very next day. Seagram suddenly proposed to buy about 41% of Conoco for $73 a share. Before the offer, Conoco shares were going for $62. Unable to match Seagram’s bid to Conoco shareholders, Cities Service promptly dropped out of the competition.

Within 24 hours Bailey was on the phone to Jefferson. “Now you can help,” said Bailey. The merger talks moved swiftly, in part because Bailey, 57, the burly son of an Indiana coal miner, and Jefferson, 59, a London-born intellectual with a Ph.D. in chemistry, knew each other well. They had worked together on joint gas-exploration ventures that Du Pont and Conoco had begun three years ago in Texas. Jefferson flew to Stamford four times in the next eight days. All along, he assured Bailey that Conoco’s management would not be changed.

Suddenly, in the midst of discussions between Du Pont and Conoco, another competitor appeared. Texaco made an offer for Conoco that was roughly comparable to Du Font’s bid. But Bailey preferred to stick with Du Pont. He feared that even the Reagan Administration would balk at a merger between the two huge oil companies: a Texaco-Conoco combination would be larger than any U.S. energy firm except Exxon.

For Du Pont, the planned acquisition of Conoco is a daring departure. The 179-year-old firm, which started as a gunpowder business on the banks of Delaware’s Brandy wine Creek, now sells everything from synthetic fibers and insecticides to cookware coatings and auto paints. But for the company that invented nylon and Teflon, growth has come mainly from in-house research and innovation rather than conglomerate building. The addition of Conoco would more than double Du Pont’s size, and some Wall Street analysts fear that the new colossus would lose some technological drive. Says John Henry of E.F. Hutton: “Du Pont can forget about its image as a specialized company diversifying into high technology. It will become just a big commodities giant.”

Du Pont will have to borrow $3 billion to finance the purchase, which would more than double its debt load, and some observers think that Conoco might be too much to digest. Du Pont has a reputation for being a tightly run company that frequently shifts managers between product lines to give them broader experience. Asserts Thorn Brown, an analyst with the investment firm of Butcher & Singer: “There’s no easy way to integrate Conoco into the Du Pont operation.”

Wall Street was also shocked because Jefferson had been chief executive of Du Pont for only two months, since the retirement as chairman of the highly respected Irving Shapiro. After the merger announcement, Jefferson admitted that he had been forced “to make a very quick assessment of whether it was worth throwing our hat into the ring.” In fact, one of the first steps Jefferson took in assessing the merger was to call Shapiro for advice. Recalls Jefferson: “We thought about it and concluded that in a merger with Conoco we would be stronger than as Du Pont alone.”

Du Font’s interest in Conoco is understandable. Petroleum is the raw material for some 80% of its products. Like all chemical makers, Du Pont has been badly hurt by the surge in oil prices since 1973. Now Du Pont will have its own private supply of crude. Last year Conoco produced 374,461 bbl. of oil per day worldwide, of which 36% came from U.S. wells. Moreover, Jefferson contends that Du Pont scientists will be able to help Conoco develop new techniques for boosting the yield from oil wells and converting coal into synthetic fuel. Conoco is the second largest U.S. producer of coal.

Du Font’s surprise foray shows that few companies or industries are immune to merger fever. As a result, the ranking of top U.S. firms has become almost as volatile as Billboard magazine’s Hot 100 pop record chart. The strategies behind the mergers are as varied as the deals themselves. American Express, for example, grabbed the Shearson Loeb Rhoades brokerage house on its way to becoming a one-stop financial service center. To enhance its power on grocery shelves, Nabisco merged with Standard Brands.

The most popular targets of all, though, are companies rich in natural resources. Fast-rising mineral and energy prices have made their reserves in mines or oilfields ever more valuable. In April,

Fluor Corp. paid $2.7 billion to acquire St. Joe Minerals. The Kennecott copper company fought off a takeover attempt by Curtiss-Wright Corp. this year, only to be swallowed by Standard Oil Co. of Ohio. The oil companies are both the hunters, because their coffers are overflowing with petroprofits, and the hunted, because of the value of their deposits still in the ground.

Moreover, inflation in construction costs has encouraged companies to buy existing factories rather than build them and acquire mines rather than dig their own. Concludes Tomislava Simic, an expert on merger patterns for Chicago’s W.T.

Grimm & Co.: “Companies don’t want to take the risk of establishing new ventures. They want to acquire those with an already profitable track record.”

The merger binge has been a bonanza for a special breed of Wall Street investment banker who negotiates the megabuck deals. Acquisition teams at First Boston Corp., which handled Du Font’s bid for Conoco, and Morgan Stanley, which advised the oil company, are expected to earn almost $15 million each from the merger.

Some economists fear, however, that what is good for the Wall Street merger makers is bad for the health of the economy. Says Walter Adams, professor of economics at Michigan State University:

“Merger managers are playing short-term games that will not create a single new job, build a single new factory or add anything to U.S. technology. The economy is likely to be hurt by merger activity that is senseless and in fact creates Brobdingnagian corporate monsters with no need to compete or push hard.”

Other experts, like Yale Law Professor Robert Bork, disagree strongly. Says Bork: “When I see business managers deciding to merge, and I can see that it doesn’t eliminate competition, then the only thing it does do is increase business efficiency. Anything that increases business efficiency helps—at home and in foreign markets.”

The Reagan Administration agrees with Bork. In fact, Bork’s writings are required reading for incoming Justice Department antitrust attorneys.

Argues Attorney General Smith: “Efficient firms should not be hobbled under the guise of antitrust enforcement.” His antitrust chief, William Baxter, last week acknowledged that the Administration was creating “in many senses a more favorable atmosphere for mergers.”

Since Baxter assumed his post in March, his trustbusters have filed only four new suits, compared with the 25 started during the same period in the Carter Administration. Baxter last week dropped two of the antitrust cases inherited from Carter: one against Mack Trucks and the other involving two firms in the brick-selling business. In light of the new attitude, Government approval of the Du Pont-Conoco match-up appears almost certain.

The limits of this big-is-beautiful philosophy may be severely tested in the coming months. No sooner had Du Pont and Conoco exchanged vows than Wall Street was abuzz with speculation about the next multibillion-dollar corporate link. The best bet is a union between Texaco and Cities Service.

And what about Edgar Bronfman?

The Conoco disappointment was the second time this year Seagram had been left at the altar with its $3 billion dowry. Its earlier bid for St. Joe Minerals had been quickly topped by Fluor. Will Bronfman pursue yet another U.S. company? Stay tuned. —By Charles Alexander. Reported by David Beckwith/Washington and Frederick Ungeheuer/New York