A Shark Loses Some of His Teeth

By Stephen Koepp

To many business leaders, Corporate Raider T. Boone Pickens was beginning to look like an unstoppable threat. Moving with growing audacity, Pickens and his partners had piled up more than $800 million in profits during the past three years in raids on several companies, notably Phillips Petroleum and Gulf. But last week the most feared shark in the corporate sea lost a few teeth. In his first clear defeat, Pickens grudgingly agreed to halt his three-month pursuit of California's Unocal, the twelfth largest U.S. oil company. While Pickens maintains he will at least break even on the deal, analysts expect that the Mesa Petroleum chairman and his partners will actually lose as much as $100 million. More important, the episode has broken Pickens' momentum and sent a discouraging word to other raiders.

The Texas raider ran into a totally determined foe in Unocal Chairman Fred Hartley. His company managed to repel Pickens primarily with a $3.6 billion offer to buy up part of its outstanding stock for $72 a share, compared with the raider's bid of $54. Ordinarily Pickens would have responded by simply cashing in his 12% share of the company and walking away with a fat profit. Unocal made him exempt from the offer, however, which was a daring strategy since companies generally presume that the law requires them to treat all stockholders equally. Yet in a surprising reversal of a lower-court decision, Delaware's Supreme Court upheld Unocal's plan to cut the hostile raider out of the deal.

As a result, Pickens, who realized he could lose as much as $300 million, immediately sought a peace treaty with Unocal. The company agreed to help Pickens cut his losses by buying about one-third of his group's 23.7 million shares at the $72 premium price. But Unocal is requiring him to sell off the rest at a slow pace. That process will tie up Pickens' investment until 1986 and probably put a hobble on his raiding activities. Even so, the routed Pickens was unruffled. Said he: "You can't hit a home run every time you come to bat."

The victory over Pickens was a costly one for Unocal. The company's elaborate takeover defenses, including the huge stock buy-back, will leave Unocal saddled with a long-term debt of $5.4 billion, compared with only $1.3 billion before the fight. This prompted Standard & Poor's last week to downgrade Unocal's credit rating. To support the massive debt, the company will probably have to trim back its oil exploration and perhaps even sell some assets to raise cash. Nonetheless, Unocal management saw the battle with Pickens as almost a moral duty. Many other corporate leaders agreed. Declared Armand Hammer, Occidental Petroleum's chairman: "Fred Hartley deserves a Nobel Prize for his courage and determination to ward off an attack. This will send a signal to all future raiders."

The Delaware court decision, however, struck many financial experts as a potentially dangerous step. Felix Rohatyn, a partner of the Lazard Freres investment firm and one of the most outspoken critics of Pickens-style hostile takeovers, blasted the decision because it violated the principle of investor equality. Said he: "This creates two tiers of stockholders. The vaccine is as bad as the disease. It's crazy."

Pickens was not the only raider having troubles last week. Carl Icahn made formal his bid to buy the 75% of Trans World Airlines that he does not already own, for almost $600 million. But TWA's management has asked the Transportation Department to investigate Icahn's plans, charging that he lacks the qualifications to run the airline and instead plans to dismantle it. From now on, raiders may have to look twice before picking a fight.

With reporting by Dan Goodgame/Los Angeles and Gary Taylor/Houston