The costly defeat of T. Boone Pickens Jr. in his quest to acquire Unocal has probably taken much of the punch out of the takeover wave that has swept over corporate America in recent years, experts agreed Tuesday.
At the very least, the settlement Monday of the Unocal-Pickens tussle will leave the Los Angeles-based parent of Union Oil of California saddled with slightly more than $4 billion in new debt and will probably keep Pickens out of the takeover arena for a while until he is able to sell all of his Unocal shares, analysts said.
But on a broader level, the multimillion-dollar loss that the Pickens-led investor group will probably suffer, coupled with a key Delaware Supreme Court ruling that prompted the settlement of the Unocal fight, could cause an abrupt waning of the merger mania. The court ruling was viewed as sanctioning "reverse greenmail," a potent new weapon to ward off hostile takeover attempts.
"This is a major victory for the underdog, and the underdog, interestingly enough, is the shareholder," said Suzanne Wright, a Denver-based energy industry analyst with First Boston. "This is the death of greenmail," she said, referring to the tactic in which a corporate "raider" accumulates a large stake in a company and then sells the stock back to the firm at a premium.
But takeover expert Michael C. Jensen described as "ludicrous" Friday's Delaware court ruling that Unocal need not include Pickens in its lucrative stock repurchase plan, because it allows corporate managers to pit stockholder groups against each other and to discriminate against some stockholders.
"It's an incredible victory for Mr. (Fred L.) Hartley," chairman of Unocal, said Jensen, who is a professor at Harvard Business School and the University of Rochester Graduate School of Management. "It's a loss for all the rest of us."
Unocal's board Monday approved a settlement with Pickens' Mesa Partners II investor group that allows the group to participate in the stock buy-back but to a lesser extent than other shareholders, hence the label "reverse greenmail."
Unocal agreed to exchange 9.1 million of its 23.7 million shares for new senior secured notes worth $72 per share. But Mesa will return about $100 million in securities for 1.4 million Unocal shares, so that only 32.5% of Mesa's holdings will be repurchased while 38.4% of other shareholders' stock will be bought.
Mesa also entered a 25-year "standstill agreement" under which the group agreed to stay away from Unocal, to vote all shares it owns as Unocal directs and to sell its remaining 16 million Unocal shares only under certain circumstances. Mesa can sell its stock through limited brokerage transactions or can wait until after Dec. 31 and make a broader public offering.
The price that Unocal paid for its freedom was $4.16 billion in new debt. Fees to investment bankers will total $25 million, and legal fees will be less than $10 million, Unocal Assistant General Counsel Sam A. Snyder said.
The Pickens group stands to lose between $40 million and $80 million, depending on how much it can sell its remaining shares for and how high expenses from the fight are. The group accumulated its Unocal shares at an average price of $44.72. The shares closed Tuesday at $35.875, down a whopping $10.125 from Friday. It did not trade on Monday.
"The obvious winner was Unocal's management because its strategies proved successful," said M. Craig Schwerdt, an analyst with Morgan, Olmstead, Kennedy & Gardner in Los Angeles. "The obvious loser will be Boone Pickens, who didn't accomplish his goals" and who lost money for the first time in six takeover attempts.
"It's not so easy pickings this time," Schwerdt said.
By its own reckoning, Mesa made about $598.5 million in pretax profits since 1982 in unsuccessful attempts to take over Cities Service, General American Oil, Superior Oil, Gulf Oil and Phillips Petroleum.
Schwerdt said the biggest losers were the owners of the 20 million Unocal shares that weren't tendered to the stock repurchase offer and therefore aren't eligible to receive the $72 per share worth of debt securities. "Those were probably the longest-term stockholders who had the stock salted away in a safe deposit box or were on vacation or were poorly advised," he said.
Unocal's Snyder said some shareholders didn't tender because they "don't want to do anything that will mean that they have to pay taxes." Some of them were Unocal executives near retirement who decided it was better for estate planning purposes not to sell their stock.
Because of its new debt, Unocal will have to reduce its capital expenditures, which were originally expected to be $2.1 billion in 1985.
Snyder said "belts will have to be tightened" at the company. "We're not crippled," he said, but "it will be challenging for management to proceed."