Texaco and Getty Oil: History’s Biggest Takeover?

Giant Texaco offers $9.9 billion to Getty Oil’s feuding owners

It started as a bitter struggle between Gordon Getty, amateur composer and opera singer, and the defiant managers running Getty Oil, the cornerstone of the empire built by the late Jean Paul Getty. As the battle developed, both sides resorted to intrigue and duplicity worthy of the Medicis. But late last week, giant Texaco unexpectedly entered the picture and seemed likely to emerge the winner by offering to buy up Getty Oil for about $9.9 billion. The deal, subject to stockholder approval and a green light from Justice Department antitrust lawyers, could be the largest takeover in U.S. history (previous record holder: Du Font’s acquisition of Conoco in 1981 for $7.2 billion).

Texaco, third-largest oil company in the U.S. (1982 revenues: $48 billion), snatched 14th-ranked Getty ($12.3 billion) from the embrace of a much smaller suitor, Pennzoil ($2.3 billion). Only three days earlier, before Texaco jumped into the bidding, Pennzoil Chairman J. Hugh Liedtke and Gordon Getty had sealed a $5.2 billion deal to buy up Getty Oil’s stock jointly for $112.50 a share and make the company a private firm. But then came Texaco with an irresistible offer of $125 a share. The Texaco price will bring Getty heirs almost $4 billion; a month ago, their shares had a market value of about $2.3 billion.

Getty Oil is the biggest piece of the family fortune left by Jean Paul Getty, who died in 1976. Gordon Getty, 50, youngest of three surviving sons, inherited 13% of the family oil business but, until the past year or so, scarcely seemed interested in it. Designated by Forbes magazine last fall as the richest American (net worth: $2.2 billion), Getty spent much of his time as a patron of the arts. He wrote songs based on Emily Dickinson poems and occasionally performed as a baritone with the Marin Opera Company near San Francisco, playing roles like Cascart in Zaza. Getty, of course, did not have to worry about where his next five-course meal was coming from; his Getty Oil dividends alone paid him $28 million annually.

After the May 1982 death of C. Lansing Hayes Jr., a longtime family adviser, Getty suddenly found himself sole trustee of the Sarah C. Getty Trust, named for his grandmother, a fund that controls 40% of the oil company. When he began looking at the firm more closely, he concluded that its performance was poor and its stock undervalued. The company’s market price at the start of 1983 was just $48.50 a share. Getty questioned the company’s diversification ventures, including those into insurance and cable television.

The firm in 1979 had acquired an interest in the money-losing Entertainment and Sports Programming Network (ESPN) and in 1980 had purchased the Kansas-based ERC insurance group.

When the heir urged Getty Oil Chairman Sidney Petersen, 53, and the company’s directors to reconsider corporate strategy, he ran into resentment and resistance. “I was surprised at the antics of management,” says Los Angeles Oil Analyst Craig Schwerdt. “It didn’t seem possible for them to buck the wishes of Gordon Getty and get away with it.”

Not for lack of trying, though. When a July 1983 report by Goldman, Sachs favored a $500 million-a-year stock-repurchase plan as a way of boosting the company’s market price, the Petersen-dominated board of directors rejected the idea because it would have increased the Getty family’s stake to about 53%. Indeed, the board took just the opposite tack, deciding in early October to issue new shares that would dilute Getty’s influence.

A truce seemed at hand later in October when the warring parties signed a one-year agreement that prohibited both sides from altering the status quo. But that accord lasted about as long as a cease-fire in Lebanon. During a Getty Oil board meeting in November, the directors asked Gordon to leave the room. While he was out, they decided to support a lawsuit challenging his position as sole head of the Sarah C. Getty Trust.

The suit, brought on behalf of Gordon’s improbably named 15-year-old nephew Tara Gabriel Galaxy Gramaphone Getty, had been started by the teen-ager’s father, J. Paul Getty Jr., 51, Gordon’s older brother. The two siblings have seldom got along. Gordon’s lawyers charged that oil company officials coerced J. Paul Jr.

into bringing the lawsuit.

While watching this melodrama from his Houston headquarters, Pennzoil’s Liedtke sensed that Gordon Getty might welcome a partner. Liedtke made his first move two weeks ago, with a $1.6 billion offer of $100 a share for 20% of the oil company. Then while the rest of the business world watched bowl games the day after New Year’s, Getty and Liedtke huddled over plans in Getty’s apartment on Fifth Avenue in Manhattan. Liedtke, 61, a lawyer and Harvard M.B.A., outlined a strategy that would make Getty Oil a private firm owned 57% by family heirs and 43% by Pennzoil.

That Pennzoil-Getty accord, though, drew the attention of Texaco, based in White Plains, N.Y., which has also been looking for new supplies of crude oil. Texaco’s total petroleum pool shrank 25% between 1979 and 1982, to about 1.9 billion bbl. With the addition of Getty’s supply, Texaco’s reserves would double.

Texaco Chairman John K. McKinley decided to top Liedtke’s bid. First Boston, a New York City investment banking firm, advised McKinley on the price to propose. Texaco offered $125 a share. On Friday, Getty’s board approved the deal in a hastily scheduled conference telephone call.

When Liedtke heard of the offer, he shot off a telex to the Getty board threatening to sue the company for breaking the earlier agreement and promising to exercise a stock-purchase clause entitling Pennzoil to purchase 8 million Getty shares at $110 each. That would net Pennzoil a profit of some $120 million at the price Texaco is offering to pay.

The final word has probably not been heard from Liedtke, and the Justice Department could raise antitrust objections to the merger of the third and 14th largest U.S. oil companies. But no matter what happens now, Gordon Getty has achieved his goal of driving up the price of the family’s stock. His company holdings, valued at $500 million a year ago, are now worth about $1.3 billion. — By Stephen Koepp.

Reported by Russell Leavitt/Los Angeles and Gary Taylor/Houston