Restraint on mergers
THE upholding of a huge multibillion-dollar civil damage award against Texaco Inc. by a Texas judge is sending shock waves through Wall Street -- and a signal to other corporations that there could now be a considerable amount of risk involved in entering into questionable takeover bids. Presumably the Texas case involving Pennzoil Company's suit against Texaco for breaking up a merger between Pennzoil and Getty Oil Company still has a long way to go through the appeals process. Texaco ultimately bought Getty for $10.1 billion -- the second-largest merger in United States history. Now, the massive civil damage award against Texaco by a trial jury has threatened the financial solvency of Texaco. If the award stands against Texaco -- the nation's third-largest oil producer and fifth-large st corporation -- it would become the largest civil damage award in the nation's history.
At this juncture -- with the case still in litigation -- two major issues stand out:
Of immediate interest is whether Texaco can manage to get the case out of the Texas courts and into the federal courts, or, alternatively, convince a Texas appellate panel that New York State law applies in this case. Texaco is based in New York. Pennzoil is based in Texas. The two sides could also reach a mutual settlement, or Texaco could file for bankruptcy protection. Texaco argues that there was never a valid legal contract between Getty and Pennzoil.
Of larger national concern, will the award against Texaco (now $11.1 billion) be a deterrent to other companies on the takeover or merger front?
Some legal experts believe that will be the immediate result, and, in fact, will come at a timely moment, following the spurt of takeovers in the past few years. Many of those takeovers have been based on particularly dubious methods. Congress, for its part, has been loath to enact legislation barring or limiting the merger wave, despite outlays of billions of dollars that have been involved, and the fact that many companies, CBS Inc., for example, have come out of attempted hostile mergers visibly wea kened.
Why does Congress not join the fray to prevent questionable mergers, particularly where companies issue junk bonds to finance takeovers? In part, it is felt, because investors throughout America have profited from takeover efforts. And, of course, there are some legitimate economic arguments in favor of mergers -- however hostile. Ill-managed companies tend to obtain new leadership.
Still, we are not fully persuaded that the multibillion takeover mania of the past several years has been all that productive for the American economy. One result: Corporate America has increasingly become debt-burdened, thus reducing the financial leverage of a company to enter into new programs.
For that reason, the new limits on debt financing of takeovers recently approved by the Federal Reserve Board (and hopefully to take effect early next year, pending a formal review process now under way) make good sense. The Fed would apply its 50 percent stock market margin requirements to the use of debt in such takeovers. The buyer would have to ante up at least half the purchase price.
Constitutional experts believe, however, that the Fed's curb may have only limited application.
Clearly, Congress needs to become involved in the merger mania, where company after company is being gobbled up in an acquisition wave not seen in the United States since the 1920s.