The Texaco Star Strikes Out in Houston

By Gordon M. Henry

In the world of megadollar mergers, it is perhaps only fitting that court fines are also measured in billions. Three weeks ago, a Houston jury ordered Texaco to pay Pennzoil $10.5 billion in damages for snatching Getty Oil away from Pennzoil in a takeover battle. Judge Solomon Casseb last week was due to review the decision. He could uphold, overturn or reduce the award. Journalists, high-priced lawyers, Wall Street traders and more than 200 onlookers last Tuesday squeezed into a cramped fifth-floor room in the Harris County Civil Courts Building, anticipating a decision. Casseb's verdict was expected at 1:30 p.m., but after taking the bench he called a recess so Pennzoil and Texaco could conduct last-minute discussions. Finally, at 5:17 p.m., the judge read his ruling: the jury's decision will stand. On top of the award would go $3 million a day in interest payments. Total amount now owed to Pennzoil: $11.1 billion.

Stunned Texaco officials said that it could mean the company's "obliteration." The third-largest oil company in the U.S., Texaco has a net worth of $13 billion, barely enough to cover the award. Texaco stock, which since Nov. 19 had plunged from $39.25 to $30.75, fell to $29.75 by the end of last week. Said Texaco Attorney Gibson Gayle: "What we have is the most devastating specter of disaster in legal history. It's portending the destruction of a major American company."

Pennzoil naturally was elated. The award could catapult the 36th-largest U.S. oil company into the ranks of the oil giants. Pennzoil's stock, which stood at $49.875 a month ago, closed at $66.125 last week. Upon hearing Casseb's ruling, Pennzoil Attorney Joseph Jamail and Chairman J. Hugh Liedtke exchanged bear hugs and laughed aloud. When a reporter asked a jubilant Liedtke whether he still might settle with Texaco, he replied, "We're always willing to discuss matters. The problem is that dealing with Texaco is like trying to frisk a wet seal."

Texaco won one concession in its eleventh-hour negotiation with Pennzoil: a delay in the imposition of a bond. Normally, if Texaco wished to appeal Casseb's decision, it would be required to post bond to prevent Pennzoil from seizing the property it won in court. The bond would be worth the amount of the decision plus attorney's fees and interest, in this case, about $12 billion. Texaco said that it could not come up with so much money without going bankrupt. Pennzoil agreed to a grace period during which Texaco can prepare an appeal--or, perhaps, a settlement--without having to post bond.

The events that inspired Pennzoil's suit began on Jan. 1, 1984, when Pennzoil's Liedtke and Getty Oil Scion Gordon Getty shook hands on a merger. Pennzoil agreed to pay $5.4 billion, or $110 a share, to buy 43% of Getty. The remaining 57% was to stay in Getty family hands. The two companies announced the merger to the press, signed a memorandum of agreement, even had a champagne toast. But before the paper work was completed, Texaco Chairman John McKinley approached Getty with an offer worth $10.2 billion, or $125 a share, for the entire company. On Jan. 6, Getty's board of directors accepted his offer.

Although Getty, not Texaco, was the Indian giver, he was not sued because Texaco in the merger contract agreed to assume liability for any legal actions arising from the purchase. Pennzoil's lawyers argued that Texaco must have known it was doing something wrong to offer such an inducement to Getty. Said Pennzoil Attorney Jamail: "Texaco purchased this lawsuit when they wrote insurance policies for the Getty people."

After last month's jury ruling, the case took on the atmosphere of an election campaign. Texaco waged a Lone Star media blitz, telling Texans that what was good for Texaco was good for Texas. An unfavorable judgment, company $ officials suggested, could mean the loss of jobs for 55,000 Texaco employees, including 15,000 in the state.

Texaco switched from offense to defense as Casseb's ruling approached. The company announced last week that it had adopted a so-called poison-pill provision to ward off raiders who might be tempted to try a takeover in view of the dip in Texaco stock. And one hour before going to court on Tuesday, Texaco offered to sell Pennzoil at 1984 prices the 1 billion bbl. of oil and gas reserves that it had originally wanted to buy from Getty. Liedtke called the offer "silly."

Many oil-industry officials were stunned by the decision and could see little hope for Texaco, but others felt that another court will still force a compromise or lower the settlement. In 1980 AT&T was initially ordered to pay its long-distance rival MCI $1.8 billion for thwarting competition in the telephone business. The amount was later reduced to $113.4 million.

Texaco could appeal the judgment all the way to the Supreme Court, but with the interest meter on Pennzoil's award ticking at $3 million a day, the company cannot afford a lengthy tussle. It might try to take over smaller Pennzoil, though the price would be about $5 billion and Texaco would have to take on a huge debt. Despite Pennzoil's initial refusal, an out-of-court compromise is also possible. Oil-Industry Analyst Alan Edgar of Schneider, Bernet & Hickman in Dallas believes that Texaco might let Pennzoil have for $3.5 billion the Getty properties it originally sought. That would be about $2 billion below market value.

Takeover struggles are the modern corporate equivalent of a duel of gladiators to the death. In the past it was often assumed that, as in love and war, all's fair in takeover battles. The judgment against Texaco, though, shows that there are still rules of the game and that it can be very costly to break them.

With reporting by Dean Brelis/New York and Gary Taylor/Houston