- The art of the Con
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 Texacoâ€™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 wasnâ€™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 opponentâ€™s abuse
of the legal process. Pennzoilâ€™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 Pennzoilâ€™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 didnâ€™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. Texacoâ€™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 companyâ€™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 didnâ€™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.