Phillips’ William Douce: Giving ‘The Devil His Due’
NEW YORK (AP) _ Hostile takeovers are destructive, insists William Douce, who as chairman of Phillips Petroleum Co. survived two such assaults within the past three months.
″They are destructive in terms of human effort, human values and monetary values of the owners involved,″ he said. ″Corporate raiders, as they are called, are trying to pick up a company at less than its real value″ at times when economic conditions may temporarily depress stock prices.
″It’s wrong,″ said Douce.
But such ordeals are not all bad, he conceded during a wide-ranging interview last week as Phillips escaped the clutches of New York financier Carl Icahn after earlier evading the unwelcome pursuit of a group led by T. Boone Pickens Jr., the wheeler-dealer chairman of Mesa Petroleum Co.
″I’ll give the devil his due,″ Douce said of Pickens. ″He forced us to address some things we were doing, but not at as rapid a rate as we should have been.″
He said Pickens’ pursuit prodded Phillips’ management into accelerating efforts to provide its stockowners a bigger share of the company’s $2 billion- a-year cash flow.
The company is now offering to buy back 72.5 million shares of its stock with securities valued at $62 a share. It also is raising its dividend and plans to distribute new preferred stock to its shareholders.
Douce also said Phillips emerged from the siege with a management better disciplined in the way it runs the company and spends its money.
For example, Douce said, investments that offer a return of 6 percent to 7 percent would ″no longer be good enough″ for Phillips.
But the price of survival was steep.
For Douce and other Phillips executives, the past three months have been spent in marathon meetings, sleepless nights and preoccupation with defensive strategies. That meant less time for the business of Phillips, the nation’s eighth largest oil company on the basis of sales.
For the company, the battles have resulted in a plan to take on $4.5 billion in new debt, raising such borrowing to more than 80 percent of Phillips’ total capital.
That mountain of debt, analysts say, will make Phillips more vulnerable to shifts in the economy and oil prices by reducing its options for coping with such changes.
It would not take much of a change to make waves, either.
Phillips has said that under current market conditions, each $1-a-barrel change in price could increase or reduce its annual profit by between $50 million and $60 million.
The company earned $810 million on revenue of $15.8 billion in 1984.
But if the price of Arabian Light oil, which currently is trading at $27.50, dropped rapidly to $20 a barrel, ″the company estimates that its net income would be substantially reduced and its common stock dividend would be eliminated,″ Phillips informed its shareholders in its stock buyback offer.
With a heavy debt burden, Phillips would find it difficult to raise more money from lenders if the need for new cash arose.
But Douce remains optimistic that Phillips will get by.
″We’re going to have to tighten our belt for the next three to four years and get this debt down,″ he said. He said that even with the economies, Phillips’ healthy cash flow will be maintained at more than $2 billion a year to help reduce the debt.
In addition, plans for an increase in spending on such projects as oil exploration and research on alternative energy projects have been scaled back.
And Phillips, with nearly $17 billion in assets, also will have to put $2 billion of its properties up for sale.
″Two billion dollars is not very much for a company our size,″ said Douce. ″That’s not catastrophic.″
So far, the properties to be sold have yet to be identified.
Such decisions had been unexpected late last year as Douce, whose name rhymes with house, looked forward to his scheduled retirement this spring.
But the avid poker player was hardly unprepared for a suitor taking a gamble on the company, which is based in Bartlesville, Okla. Since being named chief executive in 1980, Douce had put together a team of financial and legal advisers to quickly respond to any takeover threat.
And after becoming chairman of Phillips in 1982, Douce also helped the company expand further, with the friendly acquisitions of General American Oil Co. for $1.14 billion in 1983 and Aminoil Inc. and Geysers Geothermal Co. from R.J. Reynolds Industries Inc. for $1.7 billion in 1984.
″We have taken all the measures we prudently thought we should,″ Douce said last fall amid fresh speculation that Phillips was on some raiders’ shopping lists. ″We’ve been so used to this after three years that we don’t go home and lose sleep at night about it.″
And while the takeover battles robbed Douce and colleagues of many a good night’s sleep, Douce said he did not regret quipping earlier about not tossing and turning his nights away because of takeover jitters.
″I worry and lose sleep only about the things I can control,″ he said.
Douce said, however, he was caught by surprise when he received a telephone call while in Europe on Dec. 4 informing him that a group led by Pickens had launched a bid for Phillips.
Douce said he scheduled a management meeting in the United States the next day to assemble the defense team and study Pickens’ offer.
At first, a barrage of lawsuits by Phillips prevented Pickens’ group from proceeding with its bid of $60 a share for up to 23 million of Phillips’ 154.6 million shares.
As for strategy, ″you just evolve,″ said Douce, who turned 65 just five days after Pickens’ group began its bid for Phillips. ″Your strategy changes as you get up each day.″
Among the options Phillips considered and rejected was its own leveraged buyout of the company, in which the purchase price would be met with loans backed by the company’s assets.
Throughout the courtship by both Pickens and Icahn, Phillips insisted that if the company was to be put up for sale to benefit its shareholders, a better price could be realized at some other time, when the outlook for oil prices was less clouded.
A key turning point came on Dec. 20 when a Delaware court rejected one of Phillips’ major arguments against the takeover bid - a claim that Pickens’ pursuit of the company violated terms of a 1983 agreement between Mesa Petroleum and General American, which was then acquired by Phillips.
Douce said once that opinion was rendered, Phillips made contact with Pickens and intensive negotiations began, leading to a settlement on Dec. 23.
Pickens’ group dropped its bid for Phillips and promised not to launch another offer for 15 years. It agreed to sell the stock it had bought for an average of $43 a share back to Phillips for $53 a share, for a pre-tax profit of $89 million. Phillips also agreed to pay up to $25 million of Pickens’ expenses.
Part of that agreement was Pickens’ support for a plan aimed at protecting Phillips from further takeover bids while providing a better return for shareholders and a bigger stake in the company for employees. A vote on the restructuring was eventually scheduled for Feb. 22.
″Generally, there was a feeling that a settlement was reached and that would probably be the end of our problems of that nature,″ Douce recalled.
He said he finally arrived home at 6 p.m. Christmas Eve, having failed to do any shopping, ″and promptly went to bed.″
But discontent surfaced as speculators who had bought Phillips stock on prospects for profit from a takeover took a beating on Wall Street after the settlement with Pickens.
Rumors spread in mid-January that financiers, including Icahn, were accumulating large blocks of Phillips stock and intended to oppose the corporate facelift.
Still, Douce said, Icahn’s Feb. 4 announcement of plans to acquire Phillips came as a bit of a surprise. But he added, ″It wasn’t as big a surprise as Pickens’ announcement. We knew there was some unrest.″
This time, Phillips had a competing offer to campaign for, its own restructuring proposal.
In that plan, Phillips said it would buy back 38 percent of its stock with securities worth $60 a share, sell up to 39 percent of its stock to employees and buy an additional 20 million shares of stock for $50 a share in cash.
In the days that followed, Icahn announced plans for various takeover proposals, all conditioned upon shareholder defeat of Phillips’ plan and the arrangement of financing. He eventually began an offer of $60 a share for 70 million shares of Phillips, and said he would seek to acquire the remaining stock with securities valued at $50 a share if he succeeded in dismantling a ″poison pill″ defense.
The tactic - which gives shareholders rights to various expensive securities in the event a hostile suitor acquires a substantial block of stock - is designed to make a takeover so costly to swallow it would be ″poisonous″ to a bidder.
But evidence began to mount of resistance from institutional investors, such as managers of pension funds holding millions of Phillips’ shares.
″The minute we had indications our plan was going to fail we started thinking immediately about others courses of action,″ Douce said.
A week ago, with a preliminary count showing the Phillips’ plan was going down to defeat, the company’s board met for 81/2 hours and agreed to sweeten its proposal.
Negotiations then began with Icahn, leading to a settlement reached early last Monday.
Icahn promised to drop his bid and not to make another offer for Phillips for eight years. Drexel Burnham Lambert Inc., Icahn’s investment banker and the leading souce of such takeover financing, agreed not to raise money for an assault on Phillips for three years.
Phillips agreed to meet up to $25 million of Icahn’s expenses, and analysts estimated Icahn would make a pretax profit of $40 million on the sale of his stock.
Did Douce celebrate the truce?
″At 3 a.m., are you kidding? I went to bed,″ he said.
Meantime, Douce said he has given no thought to how he will be remembered for his role in the battles during the final months of a career with Phillips that began in 1942.
″Right now, I’m just trying to get out with my life,″ he said.