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Texaco's new chapter

By HR / April 14, 1987



THE Texaco-Getty-Pennzoil affair is sounding more and more like a case of stupidity crashing into greed after tripping over unfairness. For all the drama in the case, though, including the filing of the largest-ever bankruptcy, the long-term effects on the economy and on consumers are not likely to be very great. It all started in early 1984, when Pennzoil and Getty announced an agreement for the former to buy 43 percent of the latter. Once Texaco officials heard of the deal and found that formal papers had not been signed, they went into action planning their own takeover of Getty, a bid which it accepted forthwith. At this point, the jilted Pennzoil filed suit against Texaco, seeking damages for Texaco's interference in the original deal.

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In late 1985, a Texas jury ruled for Pennzoil, with the largest damage award in history: $10.53 billion. District Judge Solomon Casseb later affirmed that award and, invoking a Texas law, ordered Texaco to post a $12 billion bond while the case is appealed.

The bond requirement - equivalent to Texaco's net worth - has been upheld, and now Texaco, after so far fruitless negotiations with Pennzoil for an out-of-court settlement, has announced that it is seeking protection from its creditors under Chapter 11 of the federal bankruptcy statutes.

This is clearly a tactic on Texaco's part to keep Pennzoil at bay. It also moves the focus of attention to a federal court in White Plains, N.Y., where Texaco is based. That Texaco would want to get out of the grip of the Texas state courts is understandable: The $10.53 billion judgment by the original jury was simply not an appropriate response to the suit. The judgment is nearly twice the amount of the original Pennzoil-Getty deal and vastly in excess of any financial loss Pennzoil suffered as a result of its deal falling through. Ordering Texaco to sell Getty would have made more sense.

Pennzoil, meanwhile, can be faulted for greed, first in the original suit, and now in negotiations for a settlement.

And then why did Texaco get involved with Getty in the first place? Smart oil executives know that they have to keep up their oil reserves. But Texaco has been chronically short; horning in on the Getty deal was a sign of desperation.

And yet Texaco was simply doing what many oil companies have been doing lately: prospecting on Wall Street, that is, expanding their reserves by acquiring companies rather than by drilling. It's not necessarily a bad strategy, but at the hands of a Texas jury and an overzealous Solomon, Texaco was badly burned. That oil prices plunged soon after didn't help, either.

This whole series of events is part of the ``merger mania'' wave of the last few years - remember the Gulf-Chevron-Boone Pickens triangle of the same period? But energy mavens continue to insist that the US oil industry is still much less concentrated than the public thinks.

The short-term outlook is for falling stock prices and a few nervous opera fans wondering about Texaco's Saturday afternoon broadcasts from the Met. Operating a company during a bankruptcy organization can be difficult, but Chapter 11 is probably a good temporary refuge for Texaco while it negotiates with Pennzoil, as it presumably will.