Corporate Fear and Trembling

An extraordinary specter is haunting the leaders of some of America’s largest corporations. The specter is a Texan–a very rich and wily one. His name is T. (for Thomas) Boone Pickens Jr. The danger executives see is that he may be out to buy their company, and when Pickens attacks, his prey rarely escapes unscathed. Indeed, a remarkable run of successes has made T. Boone Pickens, 56, president of Amarillo-based Mesa Petroleum, probably the most feared corporate raider on the business scene today.

Last month, in order to end a takeover fight, Phillips Petroleum agreed to buy the 8.9 million shares that Pickens and his partners held in the company. That stands to earn the group an $89 million profit, and started speculation about Pickens’ next target. “I think he is going to do the same thing again, and sooner rather than later,” says Alan Edgar, an energy analyst for Schneider, Bernet & Hickman, a Dallas securities firm. Pickens himself remains tight-lipped: “We’ll look at anything that makes sense,” he says. “And that’s the end of that conversation.”

But while Pickens is saying little about his plans, Wall Street is buzzing with speculation. Among the most frequently named takeover targets are Mobil, the third largest U.S. energy company, Texaco, the fourth biggest, Sun, which ranks ninth, and Unocal, the twelfth.

The mere talk of a takeover bid from Pickens can drive up a stock’s price. Last month shares of Mobil jumped 1 5/8 points in a day on rumors that Pickens was interested in the company. The stock of Sun and Unocal also rose on takeover talk. Moreover, when Pickens went after such firms as Cities Service and Gulf, shareholders saw the value of their holdings increase sharply. Gulf stock jumped from $40 to $80 a share in a seven-month period.

Pickens and his partners also did very well in such deals. Gulf and Cities Service, alarmed at the prospect of a takeover by him, sold out to other buyers at a higher price and thus increased the value of Pickens’ stock. Result: he earned huge profits but never took over those companies. Last year Pickens and friends made $760 million through their run at Gulf, which was eventually taken over by Chevron.

Major acquisitions, though, can have some negative consequences. The debt that companies incur to finance takeovers can reduce their earnings and lower their stock prices. Chevron shares fell to a twelve-month low of 30 last week, partly because of its heavy borrowings.

Pickens’ spectacular gains have led critics to charge that he is really an adept practitioner of “greenmail.” A greenmailer creates the threat of a takeover by buying a big chunk of a company’s stock. He then sells the shares back to the firm at a premium when its executives, fearing the loss of their jobs in a takeover, agree to buy him out. Pickens denies any intention of greenmail: “If we had wanted to greenmail Phillips, it would have been a substantially different deal. Instead, we did stay in and we did work hard for the stockholders, and I still feel very good about that.”

Big oil firms hold several attractions for Pickens. Many are rich in assets that include plentiful oil reserves. At the same time, their stock prices are often so low that the firms may be worth more if they are dismantled and their divisions sold separately than if they are kept together.

Energy producers fearful that they may be takeover targets are taking all possible defensive measures. One common tactic is to try to increase the price of their stock. That makes shareholders more satisfied and also increases the amount a Pickens would have to pay to start a takeover attempt. Last year Atlantic Richfield began buying back some of its shares with an eye to boosting their value. Similar repurchase plans have been launched by Exxon, the largest U.S. oil company, and Standard of Indiana.

Some oil-industry analysts maintain that petroleum firms would be smart to spin off some operations now and pass the profits on to stockholders in order to hold off corporate raiders. Says Edgar: “If these companies don’t see the writing on the wall and go ahead with their own restructuring programs, that action will be forced on them by shareholders.”

With the battle for Phillips over, Pickens last week was willing to discuss what he would have done with the company if he had won. He said his first action would have been to sell Phillips’ international operations and two other divisions in order to raise $5 billion to finance the takeover. Pickens claims that Phillips cannot compete in the international arena, and would be stronger as a purely domestic firm. He adds, “People were speculating that we would have gotten rid of Phillips’ research and chemical divisions. We would have done nothing of the sort.”

Pickens said he decided to take his profit and end the takeover battle when he realized that resistance by Phillips management and the townspeople of Bartlesville, Okla., where the company has its headquarters, was simply too strong. Says he: “There was no way they were going to allow me to run that company.” A.J. LaFaro, a Phillips employee who designed “Boonebusters” T shirts to protest the takeover move, boasted last week, “We’ve broken him. The man finally realized he couldn’t pick on Phillips.”

The battle for Bartlesville left Pickens bitter. Said he: “I’ve always seen myself as a stockholder’s champion, but here you had a situation where the town believes that it owns the company. It doesn’t. The shareholders own the company.”

An admitted workaholic, Pickens spent last week resting at his vacation home in Palm Springs, Calif. But he has trouble slowing down from the hectic pace that enables him to run his own company while maneuvering to take over others. Says he: “What people don’t understand is that there really are more than 24 hours in a day. I’m well organized, and I keep up with what’s going on.”

And there is always some thinking to do about the next deal. Would Pickens consider going after a company outside the oil industry? “We’d look at anything. My job is to do the best I can with the capital I have to work with.” Then the ex-high school basketball player, who remembers how excited he was when he was first able to jump up and touch the net, adds, “I am very competitive.” It is precisely that Pickens trait that has so many American executives worried.