Pennzoil award has Texaco in tough fight
Texaco was taken by surprise in court last month. Now it is bracing for a legal fight for survival. The No. 3 oil company in the United States is trying to challenge $10.53 billion in damages ($12 billion including interest) awarded to Pennzoil. Last month a jury decided that Texaco had improperly seized control of Getty Oil Company when Pennzoil had an agreement to buy 40 percent of Getty. On Monday, a Texas judge refused Texaco's request to delay a hearing in the case, scheduled for tomorrow. That leaves Texaco caught in the cogs of two states' laws and defended by a newly hired law firm.
Many legal experts say the agreement between Getty and Pennzoil was not binding under New York State law, which is the law that applies to this case. (Pennzoil is suing Texaco because Texaco indemnified Getty from any lawsuits when it acquired the company.)
The trial, however, was held in Texas and heard by Texans, the home state of Pennzoil. Investment bankers and lawyers interviewed said that the location, coupled with the public's questioning of business tactics involved in the takeover wave of recent years, created an atmosphere that put Texaco at a disadvantage.
Now Texaco is caught in the Texas court system. Under Texas law, Texaco must post the full $12 billion in a bond, meaning the company must set aside about $3 million in interest on the award every day. Also under Texas law, a judge is not supposed to change a jury verdict unless there is no evidence on the records to support the verdict. Pennzoil presented 41/2 months' worth of evidence, says Stephen Adler, the reporter covering the case for American Lawyer magazine.
Texaco appears to be in a bind, Mr. Adler says. ``There's no obvious way to get [the case] out of the state system'' and into the federal system, where Texaco might receive a more sympathetic hearing -- or at a minimum, have the damages significantly reduced. And Texaco's other big hope -- to get a new trial because the judge instructed the jury to decide whether Getty had an ``agreement,'' not a ``contract,'' with Pennzoil -- is also a long shot, Adler says.
``At the end of the trial, the judge gave a speech about how well the jury performed, how this is the American system. . . . It wasn't the kind of speech that indicated he was going to call a new trial,'' Adler observes.
Most investment bankers and lawyers think the $10.53 billion award will be reduced. Texaco, however, made a tactical mistake by not presenting the jury with its own damage assessment, for fear that it would undercut its case. Thus even if the judge eliminates the $3 billion in punitive damages, Texaco is left with a whopping $7.53 billion, which would raise the company's $11 billion debt by nearly 70 percent. There has been some speculation Pennzoil could then swallow Texaco. (Others say that Texaco cou ld decide it's better to pay a premium price for Pennzoil than to sink the money into damage payments.)
The Texaco ordeal makes the acquisition game much more difficult for companies and, to a lesser extent, investment bankers, says Samuel Hayes at the Harvard Business School. In this case, Getty's investment bank, Goldman, Sachs & Co., actively sought other bidders after Getty and Pennzoil had signed a preliminary memorandum -- which was to be changed after the two sides orally agreed on a new price -- and had written a press release announcing the merger.
``Instead of having a company go into play after an initial offer,'' he says, ``you may see more of these offers actually culminating in final deals.''
``My guess is it will have a dramatic impact in the short run,'' says Alexander Horniman, a professor at Darden Business School, at the University of Virginia. ``But if it's not reaffirmed in three to six months, the impact on the investment community will be nil.''
``No one wants to go through what Texaco has been through,'' says Jordan H. Leidman at the Indiana University School of Business. ``When you get on the legal treadmill, sometimes [a decision] may be reversed, but in the meantime you get chewed up.''