BULL STREET - The art of the Con

Texaco Slips

Oil makes people rich and rich people like to be even richer. Getty Oil, a major independent oil producer, determined to sell out and attracted substantial bidding interest among the large companies in its industry. Pennzoil, after carefully evaluating the assets, potentially penned a deal which contractually bound it to acquire 40% of the company. However, not to be dissuaded by the facts, Texaco unconscionably inked a contract acquiring 100% of Getty, who at this point had sold off 140% of itself in one of the most bizarre transactions in business history. Pennzoil was not what you would call a good loser and took Texaco, a New York company, to court in their home territory, Texas, where everyone is a “good ole boy.” Apparently what was going through Texaco’s mind during this period was the fact that Getty would make an excellent acquisition and they were so much bigger than Pennzoil that the smaller company would be a good boy and back away. For its part, Getty apparently wanted to sell the entire company and even after legally inking its contract with Pennzoil, had some second thoughts about the transaction and felt that a contract wasn’t a contract.

In a contest pitting the smaller favorite son against the eighth largest company in the United States, the stage was set for a typical David and Goliath finale. Texaco, obviously in the wrong, but much wealthier than Pennzoil, treated the case frivolously, and its highly priced lawyers botched up an already ghastly situation. At the conclusion of a trial, each party usually produces an estimate of the damages that they believe were caused by their opponent’s abuse of the legal process. Pennzoil’s “all-world legal team” spent almost five months giving chapter and verse on how the Eastern Oil Monolith had defrauded them. Texaco for some bizarre reason declined to participate in this stage of the trial, as was their right. The scene had now been set for a self-fulfilling disaster.

Whoever dreamed up this “turtle defense” got a rude awakening when the judgment was handed down. The ruling from the Court was that Texaco could pay Pennzoil $10.53 billion in cash or Texaco could put up a bond in that amount while they appealed. The decision took this form because the Court had no other evaluation of loss to fall back on other than Pennzoil’s and legally could only rely on what had been submitted, in this case, their estimate. Texaco, faced with two impossible choices, could do neither, as they obviously didn’t have the cash and nobody was dumb enough to write the bond. All that was left to do was for Pennzoil to extract assets from Texaco until they had recovered the amount of the judgment.

Texaco became an immediate pariah. Their credit was cut off; companies like Citgo and Occidental Petroleum demanded cash in exchange for crude oil and historically patient creditors demanded cash on the barrelhead. Texaco’s stock collapsed. Its lawyers were stunned at the legal dead end game they had created and started moving quickly in ever widening circles in an attempt to figure out what to do next. With the company’s life on the line, Texaco did the unthinkable: they declared bankruptcy. Interest payments ceased, dividends stopped and payment of debts were suspended. This was a first in American economic history: a company going belly-up that only weeks before had been in magnificent financial condition. While that didn’t end the story by a long shot, many in corporate American have the strange tendency to believe that they are above the law, which they feel is only for the little guys.

Consider the implications of such an action by one of the largest companies in the world, if it had occurred a decade latter in an electronically wired society. The results would have been catastrophic, and the ripple effect could well have caused economic chaos. Transactions would have remained unsettled, debts would go unpaid and many creditors would go out of business while waiting to be paid by the court. However, in the end Pennzoil realized that Texaco, having succeeded in its peculiar grandstand play, was now back in the game. Pennzoil was forced to settle but the settlement was pretty good.

 

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