Jilted

By Janice Castro.

Mergers and acquisitions have become commonplace in the U.S. oil business during the past few years, but the drama that unfolded last week as Occidental Petroleum and Diamond Shamrock first announced, then canceled, a $3.3 billion marriage was one of a kind. Negotiated in a rush, then abandoned, the deal hurt both companies, leaving each vulnerable to a takeover.

At a meeting in Los Angeles two weeks ago, Occidental Chairman Armand Hammer, 86, and Diamond Shamrock Chairman William Bricker, 52, were discussing Bricker's plans to take over a third oil firm when they began exploring a merger of their companies. As a team of more than 100 investment bankers and advisers labored through the weekend to work out the details, an arrangement took shape in which stockholders in the two firms would trade their shares one for one for stock in a new holding company. Under the terms, according to sources at Occidental, Diamond Shamrock would have become a wholly owned subsidiary of the new company. On Sunday night, Hammer and Bricker announced a tentative pact.

The agreement at first looked mutually beneficial. Shareholders in Diamond Shamrock (1983 revenues: $4 billion) would gain by a rise in their dividends from $1.76 to $2.50 per share. Shareholders of Occidental (1983 revenues: $19 billion) would see the value of their shares diluted, but they would win in other ways. Selling off some of the assets of the smaller Dallas-based Diamond Shamrock could have helped the Los Angeles-based Occidental with its capital needs in such ventures as a new oilfield in Colombia. The cash could also have been used to reduce Occidental's $3.5 billion debt, much of which resulted from its 1982 acquisition of Cities Service. Wall Street, however, did not buy the idea, and neither did Bricker's board. As soon as merger rumors began to circulate, Occidental stock began to slip in heavy trading, falling from 26 3/4 to 23 1/8 in two days, and eroding the benefits of a merger for Diamond Shamrock's shareholders. Then, when Bricker's directors examined the terms of the merger, they saw that only two of them would sit on the board of the new firm. Bricker, meanwhile, would be stepping down. Hammer had agreed to buy out his $5.2 million contract with Diamond Shamrock. After a tense meeting early Monday morning in Dallas, the Diamond Shamrock board nixed the accord. In Los Angeles, a press conference called by Hammer to announce the merger was abruptly canceled.

Oil-industry insiders said the aborted merger was a bad deal from the beginning. "It would never have worked," said Alan Edgar, an energy analyst for the securities firm of Schneider, Bernet & Hickman in Dallas. "Two ugly ducklings just won't make a swan." Concurred E.F. Hutton's William Craig: "It looked like a terrible deal for Occidental." He pointed out that Diamond Shamrock's principal oil holdings, which are in Indonesia, are being rapidly depleted.

In the days following the cancellation of the merger, Occidental shares regained most of their losses. But there can be no doubt that Bricker's stock has fallen. Said one executive who took part in the negotiations: "The way things turned out makes Diamond management look a little erratic." Furthermore, by considering such an arrangement, Bricker posted notice that Diamond Shamrock is for sale. Bricker insisted last week that his company is still "an aggressive pursuer" seeking to acquire another oil company. But in the volatile oil game, he is a hunter who could just end up being bagged.

With reporting by B. Russell Leavitt/Houston and Richard Woodbury/Los Angeles