The High Price of Freedom

By John S. DeMott.

Joy! It cascaded down Frank Phillips Boulevard and rushed along the corridors of the Jane Phillips Episcopal Hospital and the Phillips Hotel. It spilled over into Frank Phillips Airport and gushed through every Phillips 66 station in town. In Bartlesville, Okla., last week, there was good reason for jubilation. Phillips Petroleum, the eighth largest U.S. oil producer, had succeeded in stopping New Yorker Carl Icahn's bid to take over the company after earlier beating back a similar attempt by Texan T. Boone Pickens. A three-month siege by corporate raiders had ended, and worries for the future were replaced by good feelings. "Hallelujah!" declared Joe Seward, general manager of Martin's department stores. "This town is three feet off the ground." Chamber of Commerce Director Sam Cartwright was ecstatic: "Now that Phillips is saved, Bartlesville is saved, and the tumbleweeds won't take over after all."

Although the end of the dramatic struggle for Phillips (1984 sales: $15.7 billion) came as a relief to many local residents, others remained nervous. Phillips' 7,800 employees in Bartlesville, mostly white-collar professionals who make up 40% of the town's work force, were assured that their company would remain under local control; yet some jobs will probably be lost. Shareholders saw the price of their Phillips stock rise from less than $40 when the battle began to the mid-50s in December and close last week at 49 3/ 8. The clearest winners were the raiders. Centimillionaires already, they became richer still. Pickens and his partners walked away with an $89 million pretax profit, while Icahn will gain at least $50 million for 30 days of high- pressure maneuvering. Said he: "I'm happy the shareholders benefited. But I'm no Robin Hood. I enjoy making the money."

By any measure, Phillips paid a high price for independence. It emerged intact but badly bruised. Just one humiliating item on the tab: payments of $25 million each to reimburse the two raiders for the expenses they ran up while trying to take over the company. All told, Phillips Chairman William Douce estimated that the back-to-back assaults will cost the company $150 million. The ordeal will leave Phillips smaller and heavily in debt.

The battle for Phillips was so complex and changed so often that even the raiders at times grew confused amid the offers and counteroffers. It all began on Dec. 4, when Pickens, who had been buying Phillips stock since last October at an average price of $43, announced that he had acquired a 5% stake in the company and was going for more. That assault ended just before Christmas, when Phillips agreed to buy back Pickens' stock for $53 a share. Under the agreement, Phillips also consented to a financial restructuring to make the value of all stockowners' holdings equal to what Pickens received.

Not all shareholders were pleased with that arrangement. The most disgruntled of all was Icahn, who rode into town on Feb. 12 with a $4.2 billion offer to buy 45% of the company for $60 a share. When added to the more than 5% he already had, that would have given him majority control of the company. Residents of Bartlesville, who had held prayer vigils to ward off Pickens, quickly set about trying to exorcise the new threat. They burned a pile of blue proxy cards that Icahn was using to solicit shares. Women baked heart-shaped cookies with the Phillips 66 logo, sent off a batch to Icahn and stuck in the message "Have a Heart." The Leighton Venn Photography Studio posted a sign: I CAHN/ YOU CAHN/ WE ALL CAHN/ LICK ICAHN.

It was mostly for naught. Pounded almost daily by Icahn's newspaper ads, Phillips shareholders became convinced that they were being shortchanged. In a vote last month on the plan to restructure the company's finances, they rejected the deal that Phillips management had struck with Pickens. Icahn was thus able to pursue his bid for the company.

Backed into a corner, the Phillips board huddled on Sunday, March 3, and came up with a sweetener that finally satisfied Icahn. It offered to swap IOUs with a face value of $62 each for half of Phillips' outstanding shares. The plan would add $4.5 billion to Phillips' corporate debt, raising it to $7.3 billion. That would equal 75% of the firm's total worth, well above the typical 40% to 50% level for American industry.

Although analysts predicted that the debt package would be worth only about $55 a share once the securities started trading, Icahn declared victory and withdrew. "We're delighted about the outcome," he said. "Now I think it is a fair deal." Pickens chose to sell his 8.9 million shares back to the company at the $53 price that he had been promised last December. It was about time, said Pickens, that Phillips came around, instead of acting like a "mother handing a lollipop to her children one piece at a time."

Phillips Chairman Douce conceded that the debt is "higher than what's comfortable, based on the way we were raised around here." He stressed that the company has assumed a "manageable" burden. To cut debt, Phillips plans to sell about $2 billion worth of assets. Among the possibilities: the company's stake in the Ekofisk field in the North Sea, worth as much as $1.5 billion.

As the winners picked up their chips last week, there were judgments about what the Phillips drama meant not only to the oil business but to corporate America. To William Higgins, a Value Line oil stocks analyst, the fight for Phillips reflected profound changes in the U.S. economy. The raiders, he says, "are prying money loose for better investment. This has happened in every mature industry as long as there has been a stock market." To Icahn, the biggest winners were ordinary Americans, whose pensions are managed by the institutional investors who voted against the initial Phillips offer. That showed, he said, that shareholders "can stand up to the corporate establishment and get a better deal."

Takeovers in the oil industry are likely to go on "as long as you have undervalued assets," according to Joseph Fogg III of the New York investment banking firm Morgan Stanley. For its part, Phillips can rest easy. Pickens promised not to launch a new battle for the company for at least 15 years, and Icahn agreed to stay away for eight. But those may be meaningless pledges. With all its new debt, Phillips has lost much of its luster as a takeover target.

With reporting by Lee Griggs/Bartlesville and Frederick Ungeheuer/New York