Texaco, the eighth largest company in the United States and the biggest to file for bankruptcy, has made a drastic move that could buy it precious time. Few people expected Texaco to choose bankruptcy as a result of the whopping judgment a Texas court said it owed to archrival Pennzoil.
Pennzoil, which won a $10.53 billion case in 1985 charging Texaco had wrongly snatched Getty Oil from its clutches, now must join the ranks of Texaco's many unsecured creditors. Large and small, creditors must wait in line for the giant refiner to make whatever payments it can negotiate.
Under bankruptcy law, Texaco has several months to develop a plan to pay debts. The portions of Texaco protected by Chapter 11 account for only 4 percent of the company's revenue. Thus Texaco has room to maneuver.
But Texaco's bold move is clearly not without risk. History generally has not shown that companies come out ahead by seeking bankruptcy protection. Still, Texaco decided Sunday that federal bankruptcy court was less risky than pursuing appeals through the Texas court system.
``This could be the quickest bankruptcy of all time,'' says Edward Altman, a bankruptcy expert at the New York University graduate school of business. ``It's a pretty sound business strategy... I don't think they'll be hurt as much as people think.''
In Chapter 11, a company asks a court to grant protection while it reorganizes assets and operations to pay off debts. Although a common procedure when a company is financially strapped, the Chapter 11 filing is precedent-setting for a company as healthy as Texaco - with $34 billion in assets. Still, the adverse court rulings were eating into Texaco's financial stability.
The major risk of bankruptcy for Texaco, in Professor Altman's view, is that sales and profits might decline because of uncertainty. Altman believes the company must reach some settlement with Pennzoil before it can emerge from bankruptcy.
Texaco was worried about the growing threat of a cutoff of crude oil by anxious suppliers - and credit by jittery banks - that might stifle operations. Suppliers like Sonatrach, the national petroleum company of Algeria, suspended crude oil deliveries recently. Other US companies, including Citgo and Occidental Petroleum, vowed to cut off supplies unless they were paid in advance.