Knocked Down in Round 2

By Barbara Rudolph

More than a year ago, when a Houston jury ordered Texaco to pay Pennzoil an incredible $10.5 billion to settle their legal battle over a 1984 merger fight, many experts were convinced that the landmark judgment would be drastically reduced on appeal. But so far Texaco's lawyers have been unable to defuse this financial time bomb that threatens the survival of the third largest U.S. oil company. A Texas court of appeals last week upheld a staggering $8.5 billion of the original judgment.

+ Texaco Chief Executive James Kinnear was incredulous. "It is appalling," he said. "The decision supports an outrageous judgment totally at odds with both the law and the facts." The company vowed to fight all the way to the U.S. Supreme Court. In the meantime, a U.S. court of appeals in New York City has ruled that while the case is on appeal, Texaco has to post a bond of only $1 billion. Pennzoil argues that Texaco must put up the full amount of the judgment, and the Supreme Court is expected to rule on this issue by midsummer.

The original decision held that Texaco unlawfully persuaded Getty Oil to break off a merger agreement with Pennzoil. Subsequently, Texaco bought Getty. Last week the appeals court concluded that the initial $7.5 billion in basic damages represented a fair award but ruled that Texaco's punitive damages should be cut by $2 billion. Including accumulated interest, Texaco now owes Pennzoil a total of $10.2 billion. The judgment remains by far the largest ever awarded in a corporate court battle.

Joe Jamail, the Houston lawyer who has become a Texas folk hero by championing Pennzoil's case, crowed about his latest triumph. Said Jamail: "I'm a happy man today. The judgment says that the conduct of Texaco management was guilty and malicious." Investors share his enthusiasm: Pennzoil stock rose 10 1/8, closing the week at 81 1/8, while Texaco shares fell 3, to 35 1/2.

If Pennzoil pockets anything close to an $8 billion judgment, analysts expect it to go on an acquisition binge in the oil and gas exploration business. Pennzoil's chief executive, J. Hugh Liedtke, who has been running the firm for 25 years, has long wanted to lead Pennzoil into the major leagues. Liedtke, 65, was scheduled to retire this month, but to no one's surprise, he has announced he will stay on indefinitely.

Still confident of winning on appeal, Texaco has not yet faced any unusual hardships. Some oil executives may be anxious about the company's future, but the depressed state of the industry ensures that almost no one turns down a chance to do business with Texaco. No creditors are demanding to be paid in cash. There can be no doubt, though, that its battle with Pennzoil has preoccupied Texaco executives and employees. All are well aware that if Texaco loses the final round of its battle with Pennzoil, the firm will have little choice but to file for bankruptcy protection.

A more likely denouement of this corporate drama is that Pennzoil and Texaco will finally strike an out-of-court deal. Texaco might pay Pennzoil in cash, or transfer some assets, including, perhaps, the Getty Oil company. The two companies have tried and failed to make their peace several times so far. After its latest victory, Pennzoil is sure to drive a harder bargain than ever.

With reporting by Raji Samghabadi/New York and Gary Taylor/Houston