Clash of the Titans

By Alexander L. Taylor III.

Mobil tries some tough tactics in its battle to take over Marathon Oil

With stunning swiftness, the $6.5 billion battle between Mobil Corp. and U.S. Steel for control of Marathon Oil turned nasty last week. Mobil, still frustrated and angry over its defeat by Du Pont earlier this year in the struggle to take over Conoco, seemed on the brink of losing again. Then Mobil suddenly went on the offensive with a daring ploy. The oil company announced that it intended to buy up to 25% of its bidding rival, U.S. Steel. Said one banker involved in the dealing: "They have tried to put a gun on the head of U.S. Steel."

Executives of the nation's largest steel producer agreed. They denounced the Mobil move as "a very reckless action aimed solely at coercing U.S. Steel to abandon its acquisition of Marathon." Reckless or not, Mobil revealed that it already owns 450,000 shares of U.S. Steel. And at the current stock price of $31% a share, the one-quarter ownership of the steelmaker would cost Mobil only about $700 million.

Financial experts speculated that Mobil was really trying to force the steel company to drop out of the bidding for Marathon or, alternatively, to get control of enough U.S. Steel stock so that the steel company would have to give up part of Marathon. Such aggressive tactics have worked before. Dome Petroleum of Canada last spring bought about 25% of Conoco as a means of compelling that company to relinquish interest in a Canadian oil property that Dome wanted.

The latest U.S. Steel-Mobil skirmishing was a perhaps fitting climax for a year of Brobdingnagian company mergers, and it also brought out increasing protests about corporate takeovers. Mobil is now viewed by many in the financial community as a reckless predator that is willing to spend extravagant sums and stop at almost nothing to acquire another oil company. Meanwhile, critics charge that U.S. Steel should be spending its money to update its antiquated and uncompetitive steel plants rather than trying to buy a company in an industry far removed from its field.

Mobil entered the battles for Conoco and Marathon because it desperately wants to get additional domestic oil and gas sources to ease its dependence on supplies from Saudi Arabia and some potentially unstable countries. Even though Mobil spent $4.3 billion on domestic exploration and production between 1976 and 1980, its U.S. reserves declined by 6% in the past five years. Buying Marathon could increase Mobil's American oil supplies by 75%. For example, the Yates Field in West Texas, where Marathon owns a half-interest, now produces 100,000 bbl. a day.

Mobil, however, has been ham-handed in its efforts to buy another oil company. Some industry observers blame its failures on the insistence of Chairman Rawleigh Warner and President William Tavoulareas that they plan their own tactics without consulting outside advisers. Mobil lost out to Du Pont in the contest for Conoco by coming in with a low bid. Its initial $5.1 billion offer for Marathon in October was also immediately denounced as "grossly inadequate" by the company's president, Harold Hoopman. Said a leading investment banker: "If Mobil had bid $126 a share from day one, instead of $85 a share, they would have cut out U.S. Steel from the beginning."

Some Wall Streeters speculate that in addition to seeking new American supplies of crude, Mobil is trying to find the limits of the Reagan Administration's antitrust policy. Says Philip Dodge, an oil analyst for Donaldson, Lufkin & Jenrette: "Mobil is really testing how far it can go in bidding for another oil company. In going after Conoco last summer, it never became clear whether there would be any antitrust objections."

Mobil's bet-a-billion tactics, though, are disturbing many executives in the oil industry. Says one competitor: "If Mobil continues to be this aggressive, there may be new antitrust legislation. It would be better if they started to back off." Responds President Tavoulareas: "You're bound to be criticized as lead dog. Other oil companies just don't have the guts to do it."

Mobil has long been the lonely end of the oil industry. Consigned to runner-up status among petroleum refiners behind giant Exxon, it has earned a reputation for being combative and controversial. While some oil companies were worried about the political impact of venturing into other areas of business, Mobil jumped into retailing by spending $1.8 billion to buy Marcor, the parent company of Montgomery Ward.

Mobil's bid for Marathon seemed doomed almost from the start. The company suffered defeat after defeat in a series of legal battles fought on several fronts. Last week a federal district court judge in Cleveland again upheld his own decision that the Mobil takeover would reduce competition among gasoline retailers in the Middle West and should not be permitted. Only a few days earlier, another federal court judge in Columbus denied Mobil's request to stop U.S. Steel's offer for Marathon.

The biggest setback of all came at the hands of the Federal Trade Commission, which has become generally more promerger since the beginning of the Reagan Administration. The FTC sued Mobil for violation of antitrust laws in order to block the takeover bid. The FTC has left a loophole, though, that would allow Mobil to go ahead if it gives up some of Marathon's gas stations and its distribution network. But the agency still refused to consider Mobil's offer to sell off part of Marathon's holding to Amerada Hess Corp., another oil company, as a way of maintaining competition in markets where both Mobil and Marathon do business.

U.S. Steel, meanwhile, has executed some brilliant takeover strategy maneuvers. It has already acquired the right to buy Marathon's share of the Yates Field for $2.8 billion if the company is bought by Mobil or any other corporation. U.S. Steel also obtained an option from Marathon to buy an additional 10 million shares of its stock, which would make it harder for Mobil to gain controlling interest in the company. Mobil, of course, could try to block both moves in court.

Mobil's fumbling maneuvers apparently have convinced Marathon shareholders that the oil giant will never be able to buy the company, even though it is now offering $1 a share more than U.S. Steel. As a result, more than enough investors are willing to sell their shares to the steel company for the $125 it offered to give it controlling interest. Said a Wall Street banker involved in the negotiations: "Unless Mobil can pull a rabbit out of the hat, it will lose."

Marathon's executives and their advisers were confident last week that they could defeat Mobil's latest threat. If the oil company starts buying U.S. Steel stock, the price of it is likely to shoot upward, which would make the deal less attractive. And under a federal law that requires prior notice for the purchase of large blocks of stock, Mobil has to wait at least 30 days before it can begin to acquire any more shares of U.S. Steel. But although Mobil's latest shot seems likely to fail, no one is underestimating the oil company's resourcefulness. Said one industry analyst: "Mobil is like the shark in Jaws. You never know where it's going to pop up." --By Alexander L. Taylor III. Reported by Frederick Ungeheuer/New York and Paul A. Witteman/Detroit

With reporting by Frederick Ungeheuer/New York, Paul A. Witteman/Detroit

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