Striking the Richest Deal

By Alexander L. Taylor III

Gulf and Standard Oil of California agree to a monumental merger

For a time last week Pittsburgh looked like the gambling capital of the world. A trio of high rollers, each backed by $6 billion or more, flew into the city. Under the rules of the game they were playing, each had to assemble his best hand by 9 o'clock Monday morning, then make one bet without seeing the chips of the others. The jackpot: Gulf Oil, the fifth-largest U.S. petroleum company and one of the ten biggest corporations. After seven hours the winner was announced: Standard Oil of California, best known for its Chevron gas stations, whose cash bid of $80 a share, or $13.2 billion, became the most ever paid for one American corporation by another. Said Socal Chairman George Keller, 60, after it was over: "It's more than I would have liked to have spent, but I was in a poker game and couldn't see the other players."

In this direct and dramatic way was concluded the biggest corporate takeover in U.S. history. Its elements of cold calculation, high risk and individual daring made the move seem entirely characteristic of the oil industry, which has always rewarded the nervy gambler. Socal now stands to become the third-largest American oil company; its combined revenues of $57.3 billion would place it behind only Exxon (1983 revenues: $94.6 billion) and Mobil (1983 revenues: $58.5 billion), A completed deal would also make Socal the largest U.S. gasoline retailer, with 10.2% of the market and stations in every state but Wisconsin and North Dakota. Most important, Socal will have gained control of Gulfs 1.9 billion bbl. of worldwide proven oil reserves, including a vital 723 million in the U.S.

Not unexpectedly, the proposed joining of the two giants set off a gusher of criticism from consumer groups and politicians. In Congress, critics threatened legislation either to block the deal or at least to prevent any further oil mergers. Thundered Ohio Congressman John Seiberling, a Democrat: "It is time to send a message to the oil industry--unrestrained mergers between huge companies suppress competition, endanger our energy independence and threaten productive drive in this country."

Socal immediately said that it would sell many of Gulfs refineries and service stations after it acquired them to keep antitrust considerations from stopping the merger. Still, nervous investors were worried that the deal might fall apart or be stopped by the Government; Gulf shares dropped instead of rising toward the $80 takeover price. The stock closed the week at $65.13.

The threat of Government antitrust action did end one proposed merger last week. U.S. Steel called off plans to link its steel operations with those of National Steel because of probable opposition from the Justice Department.

If the Gulf-Socal merger goes through, it will be the climax of a run of takeovers that has been reshaping the oil industry. In the past 32 months five large oil firms (Gulf, Getty Oil, Conoco, Marathon Oil and Cities Service) have been swallowed up. Last week's news set off renewed speculation about which energy companies would be acquired next. Among the most frequently mentioned targets: Superior Oil, Kerr-McGee and Amerada Hess.

For one oil giant, the immediate danger of a hostile takeover ended last week. Texaco announced that it would buy back the 25.6 million shares of its stock (9.8%) that had been acquired by Fort Worth's billionaire brothers Sid, Edward, Robert and Lee Bass. But Texaco, which only last month acquired Getty Oil in a $10.1 billion deal, paid a big premium to remove the threat. It will give the Bass family $50 a share for stock that cost them between $38 and $40 a share. Their profit in the transaction: upwards of $260 million.

Gulfs end as an independent oil producer brought a sense of resignation to its executives and employees. The company had been under siege for six months by Texas Oilman T. Boone Pickens Jr., 55. Pickens and his backers had acquired 13.2% of Gulf stock and were ready to grab an additional 8.1%. The company feared that Pickens would then mount a takeover effort that would lead to Gulfs breakup. Said Pickens last week after Socal's triumph: "I'm happy because our original plan was to maximize the values for all Gulf stockholders, and that's definitely been accomplished." Pickens also made out well for himself (see box).

As the weakest of Big Oil's Seven Sisters, Gulf was vulnerable to a raider like Pickens. It began life in spectacular fashion with the 1901 tapping of the famed Spindletop field in Texas, and long had the backing of Pittsburgh's superrich Mellon banking family. But Gulfs wells in Kuwait, one of the keys to its success, had ceased to pump big profits, and its domestic reserves shrank without being replaced. The company's image and morale were badly hurt when Chairman Bob Dorsey resigned in 1976 after revelations that Gulf had made $12 million in questionable contributions to figures like former Senate Minority Leader Hugh Scott and officials of the South Korean government.

Under Chairman James Lee, 62, a Mississippi-born chemical engineer, Gulfs prospects had been brightening. Yet the company timidly backed out of a planned merger with Cities Service two years ago, allowing the refiner to be acquired by Occidental Petroleum. Meanwhile Gulfs earnings were slipping, and by last year its stock was selling for less than $30 a share.

To avoid falling into Pickens' hands, Gulf put itself up for sale. When its board members gathered round a long table in the wood-paneled room on the 31st floor of Gulfs Pittsburgh headquarters last week, they had three bids to consider: Socal's, one from Atlantic Richfield (Arco), the seventh-largest U.S. oil firm, and an offer from Kohlberg, Kravis, Roberts & Co., a concern that specializes in so-called leveraged buyouts, which are financed by loans secured by the assets of the acquired firm.

Though Arco had amassed a $12 billion line of credit through 61 U.S. and foreign banks led by Chase Manhattan, it bid low, reportedly only $72 a share, or about $11.8 billion. Kohlberg, Kravis, Roberts offered more money, $87.50 a share, and the promise of less antitrust pressure because it is not in the oil business. But it had only $6 billion in credit, from a consortium headed by Bankers Trust Co. The company said it would need several months to borrow the rest.

Sensing that Gulf's problems with Pickens presented an opportunity, Socal had been preparing for a possible Gulf bid for two months. Often criticized for a lack of interest in mergers, Socal had earlier considered buying Getty Oil but failed to move quickly enough to parry Texaco's successful offer. When Gulf opened up its books two weeks ago, Socal flew four analysts from its San Francisco headquarters to Pittsburgh and eleven geologists and accountants to Houston to look at boxes of Gulf maps, reports and documents. It also lined up $18 billion in bank credit, with the help of Bank of America President Samuel Armacost, a member of the Socal board.

On the day of the sale, the Socal team, accompanied by a retinue of lawyers, tax experts and investment bankers, was sequestered in a three-room suite at one end of the Gulf Building's 36th floor. At noon Keller was called before Gulf directors. All morning he had been thinking about an offer of $79 a share. But minutes before being summoned he decided to up that to $80. His presentation lasted exactly 23 minutes. Then Keller returned to the 36th floor, where he and the others were fed chicken-salad sandwiches and coffee. Finally, the phone rang at 4:03 p.m., with Gulfs Lee on the other end. He told Keller, "George, you're the winner." The Socal chairman then turned to his colleagues. "It looks like we've bought an oil company," he said.

For Socal, the Gulf deal brings a new public prominence to a firm long known for its conservatism. One of the 34 companies created when the Supreme Court broke up Standard Oil in 1911, Socal, its executives occasionally joked, prided itself on "never being first" in many endeavors. It was not until recently that women were allowed to work, even as secretaries, in the executive suite. This staid image has continued to moderate under Keller, a Kansas City-born engineer who has spent his entire professional life with the company. Yet as recently as 1981 Keller insisted that Socal would never bid for oil firms because the money would be better spent uncovering new reserves.

No more. As petroleum engineers are fond of saying, "All the easy oil has been found." Oilmen resist comparing the cost of buying reserves with finding them, saying that it depends on variable drilling expenses, tax consequences and other factors. But in acquiring Gulfs oil reserves to go with its own 1.6 billion bbl., Socal is buying crude for $4 to $6 per bbl., compared with exploration costs of around $12 per bbl. Says Energy Analyst David Ullom of the Bateman Eichler, Hill Richards brokerage in Los Angeles: "It was economics pure and simple. It was a chance to buy oil cheaper than going out and finding it."

U.S. oil companies are faced with a choice of acquiring new reserves one way or another, or of pumping themselves out of business. Domestic reserves dropped from 33.5 billion bbl. at the end of 1976 to 27.9 billion bbl. at the end of 1982. With oil prices stable and consumption shrinking (down from 18.8 million bbl. per day in 1978 to 15.1 million bbl. per day in 1983), oil firms do not have nearly as much money to pay for exploration.

But having bought Gulfs oil, will Socal do less exploring on its own? Since it is spending $13.2 billion on Gulf, critics argue, it is not going to have much left over for drilling. Ed Rothschild, assistant director of the Citizen/Labor Energy Coalition, maintains that the reduced competition resulting from the merger will encourage Socal to explore less and charge more for its oil. Says he: "The losers in this deal are the U.S. economy, competition in the domestic oil and gas industry and the consumer."

Not so, say economists and industry experts. They contend that there is no reason why the combination of Gulf and Socal should not continue to do nearly as much exploration as the two were doing separately. In addition, they note that if the stock value of oil companies continues to go up, the resulting higher value for reserves swill encourage more drilling. Even the effect on crude prices will be slight. Economist Alan Greenspan of the Townsend-Greenspan consulting firm observes, "These mergers are, in the world scheme, not terribly relevant. Even if they were, it is a competitive market, and no matter what these oil companies might like to do, they can't affect the price of crude."

Experts also downplay any major consequences of oil mergers on America's dependence on the Organization of Petroleum Exporting Countries. Says Walter Levy, a leading oil consultant: "OPEC in general benefits from larger markets for its oil. To the extent that Socal-Gulf and other mergers tend to erode the impetus for domestic exploration, OPEC will benefit--but only marginally so."

The merger of Socal and Gulf is not expected to receive any strong Government opposition on antitrust grounds. Said Energy Secretary Donald Hodel last week: "Politically, it's a tough issue because it is a natural reaction to say, 'My gosh, these giants are merging and there must be something bad about that.' But I don't see that it has any significant effect from an energy standpoint."

Despite the prominence and publicity given to Big Oil, the U.S. petroleum industry as a whole remains remarkably diverse. The four largest refiners (Socal, Exxon, Shell and Standard Oil of Indiana) control only about 29% of the market. By comparison, the four top companies in the typical manufacturing industry control an average of 40%. Says a top Federal Trade Commission official: "We could conceivably stop the merger, but it would take the clearest sort of signal from Congress before it would happen."

So far, the congressional signals are mixed. The Senate voted down two antimerger bills in February, but support for new measures may be growing. Opponents of an antimerger bill think such a step could become a popular election-year issue. Says Oklahoma Senator Donald Nickles: "An anti-merger bill could happen easily, and sentiment is much higher now after the Gulf deal."

Few events could spur legislation more quickly than another big oil takeover. Flush with then" recent successes, Pickens and the Bass brothers might go after other companies. Arco, having been spurned in its bid for Gulf, may also start shopping. To be sure, there is not likely to be another combine of the size of the Gulf-Socal deal. But as long as the price of oil shares remains cheap compared with exploration costs, merger fever in the oil industry will be far from burned out. --By Alexander L. Taylor III. Reported by Richard Woodbury/San Francisco and Adam Zagorin/New York

With reporting by Richard Woodbury, Adam Zagorin