Pennzoil versus Texaco. (Worth 60 points). Please consider the following case and let me know what you might advise if you were the CFO of TEXACO. It was right before New Years Eve in 1983 when Pennzoil, a giant oil company, launched a bid to get 20% of Getty Oil stock. The Getty shareholders werent getting along it was rumored. After a lot of bickering, Gordon Getty tried to buy a larger position in the company but failed. So, Gordon decided to sell off his shares. This put Getty Oil in play and competitors and corporate raiders rallied to get involved. Getty Oil had one thing that its rivals didnt have oil in the ground.

The other oil company giants had better marketing and distribution networks but not the raw materials of Getty. On New Years day, in 1984, Pennzoil board chair, John Liedtke and Gordon Getty met to discuss a plan whereby Pennzoil would acquire about 40% of Getty Oil among other things. The next day, Getty Oil contacted Texaco to invite a bid after telling Texaco that Getty Oil was in play.

Thats when things got really interesting and all parties were moving at great speed to gain control and/or best share price, depending on which side you were on. On January 4th, the Getty Board met and approved a merger with Pennzoil for $112 per share. The board and Pennzoil meeting ended with both agreeing to the terms of a merger with Pennzoil getting 40% of the shares of Getty Oil. Champagne was poured, handshakes went around the table and there was great celebration after their oral agreement. No documents were signed. After all, there would be many terms to be agreed to first, then reduced to writing, reviewed, and signed after all parties and their respective lawyers drafted the definitive documents.

Before the definitive documents could be signed, Getty was getting anxious. It appeared to them that Pennzoil was delaying their preparation of the merger documents. Texaco, knowing the deal with Pennzoil remained unsigned, began talks with Getty and, urged on by Getty to bid, reached an agreement with Gordon Getty for a much higher share price than Pennzoil had offered. Gordon wanted to take the higher share price, naturally, but he said hed sell his shares to Texaco only if, in the event Pennzoil sued, Texaco would agree to indemnify Getty. Texaco agreed. Getty and Texaco put out a press release announcing, in principle subject to a definitive merger agreement. And two days later, January 6th, Texaco announced that it had acquired Getty Oil. The reaction from Pennzoil was swift and it immediately filed a lawsuit against Texaco alleging that Texaco had interfered illegally in the PennzoilGetty negotiations.

The trial went all the way to a jury verdict with Pennzoil winning the case at the trial level. Pennzoil was awarded about $11 billion. An appeal was filed by Texaco and the award was reduced to about $2 Bil, however, due to the passage of time the interest and penalties on the amount to be paid by Texaco to Pennzoil increased and yet again, Texaco was to pay Pennzoil just over $10 Bil for its interference in the deal. Texacos CEO, James Kinnear, pondered as to whether Texaco would have to file for bankruptcy if Pennzoil took steps to secure the judgement. In other words, if Pennzoil got the courts to allow it to file liens against Texacos assets in order to collect on the court award, Kinnear postured that he would just file for bankruptcy. In addition, Kinnear said that hed take the case all the way to the Supreme Court if necessary and he felt he had good reason given SEC laws to allow him a pathway to do so. Recall, too, that under Texas law, Pennzoil (as a judgment creditor) would be allowed to execute a lien on Texacos property UNLESS Texaco filed a bond (to allow for an appeal) in at least the amount of the judgment, interest and costs. Texaco couldnt post this large a bond.

Pennzoil remained undeterred and began to take actions to file the liens. Faced with his threats failing, Texaco softened its approach and tried a last-ditch effort to save the company - it made Pennzoil an offer to settle all claims for $2 Bil. The board chair of Pennzoil, Hugh Liedtke, huddled with his many financial advisors before responding to an offer to settle from Texaco for $2 Bil: Any settlement between $3 billion and $5 billion would be fair. You are on the Texaco team providing financial advice. What would you advise Texaco to do? Should Texaco offer more than the $2 Bil? Consider what you have: the possibility that you could win or lose at the next court of appeal decision but possibly incur inordinate costs to see this through time and money and lost business opportunity, AND the accruing interest on the award continues and thats not small change.

How do you handle the bond that must be filed? Your options: If the offer to settle for $2Bil doesnt work, would you recommend Texaco filing for bankruptcy or maybe increasing the offer? Or do nothing. Youve been asked to write a memo for Texaco advising them what to do. What would you write? We know what ultimately happened but was it well reasoned? Write as if this just occurred. Would the same result occur today in your opinion? (limit your response to no more than 1-2 pages).