A Small Price to Pay

By Gordon Bock

For nearly four years, Texaco and Pennzoil have been corporate America's equivalent of Iran and Iraq, fielding armies of lawyers to pound each other with salvos of briefs and appeals. Last week the war came to an end. Both sides announced that they had reached an agreement to settle the historic dispute that drove Texaco into bankruptcy court and has already generated about $100 million in legal fees, with more sure to come.

Under the deal Texaco will pay Pennzoil $3 billion. That is far less than the $10.5 billion penalty that a Texas jury ordered Texaco to give Pennzoil in 1985. The jury held that in early 1984 Texaco illegally acquired Getty Oil, which had already promised to merge with Pennzoil. But Texaco was determined to appeal the case to the U.S. Supreme Court. The stakes were frighteningly high. If Pennzoil refused to settle and then lost, it might have wound up with nothing. If Texaco lost, it would have been destroyed.

Despite strong incentives to settle the dispute at times seemed irresolvable. The bitterness peaked last April, when Texaco filed for Chapter 11 protection to avoid posting a bond to cover the jury award. Charged Texaco Chief Executive James Kinnear: "Pennzoil has placed its own greed above any consideration of fundamental fairness or the public welfare." Said Pennzoil Chairman J. Hugh Liedtke: "Maybe now we should sit back a while and see how they like bankruptcy."

The man who helped force both sides to talk was TWA Chairman Carl Icahn, better known as a raider than a mediator. In November, Icahn became Texaco's largest shareholder by gaining control of 12.3% of its stock. Then he began a round of shuttle diplomacy between Liedtke and Kinnear. Icahn knew that his holdings, plus a 2% stake in Pennzoil, would surge in value if a deal was struck. Sure enough, as word of the settlement leaked last week, Texaco shares rose 8%, to 38 1/2, while Pennzoil stock jumped 6%, to 79 3/8.

But bringing the antagonists to terms was no easy task. At one point, Icahn urged Kinnear to offer a $4 billion settlement. "You have to do something," Icahn said. "What are you going to do?" Kinnear calmly responded, "I don't know. I think I'm going fishing." Icahn retorted, "Well, when you come back, they may have taken your company away from you." Said Kinnear coolly: "Well, they won't get my fishing pole." A day later, Icahn was back to report that he had persuaded Liedtke to settle for $3.5 billion. Kinnear still rejected the deal. "You've already saved $500 million with one day's work," he told Icahn. "Keep at it."

In the end, it was not only Icahn but a committee of Texaco shareholders that pushed the two companies into agreeing on a $3 billion figure. The settlement will remove the dark cloud of uncertainty that has hovered over Texaco and enable it to emerge from bankruptcy. As for Pennzoil, the money may encourage the company to go shopping for smaller oil firms. The biggest winner of all may be Texas Lawyer Joseph Jamail, who will reportedly get a $600 million cut for leading Pennzoil's attack against Texaco.

The agreement comes not a moment too soon, because the oil industry may be facing rough times. When the Organization of Petroleum Exporting Countries failed last week to reach a meaningful pact to curb production, the price of oil futures plunged from $18 per bbl. to $15.58. If prices collapse, at least Pennzoil and Texaco can start putting their resources into the businesses again instead of into the pockets of their lawyers.

With reporting by Deborah Fowler/Houston and Thomas McCarroll/New York