Never have the stakes in a corporate battle been higher. After losing a crucial decision in the U.S. Supreme Court last week, Texaco faced the disastrous prospect of having to post a $10 billion bond in its epic legal fight with Pennzoil. As its stock plummeted and its credit began to dry up, the company was thrown into a financial crisis. Over the weekend, Texaco's board of directors gathered for an emergency meeting at the firm's White Plains, N.Y., headquarters. Following a marathon discussion, the directors chose a stunning course: the eighth largest U.S. industrial corporation (1986 sales: $32.6 billion) and the third-ranking oil firm filed for Chapter 11 protection on Sunday. Texaco suddenly became the biggest company in American history to go into bankruptcy.
Texaco made that dismal choice only after frantic, repeated efforts to reach a settlement with Pennzoil produced no results. Within hours following the Supreme Court's ruling, Texaco Chairman Alfred DeCrane, 55, and Chief Executive James Kinnear, 59, flew with a battery of lawyers from White Plains to Pennzoil's home city of Houston. But Pennzoil's combative chairman, J. Hugh Liedtke, 65, who has stayed on past retirement age to fight the case, steadfastly refused at least ten settlement offers from Texaco. At the start of the talks, Texaco apparently had a figure of $500 million in mind, but Pennzoil was believed to have held out for at least $3 billion.
The dispute had taken on historic proportions in November 1985, when a Texas jury issued a $10.5 billion judgment against Texaco for inducing Getty Oil to break a merger agreement with Pennzoil. After more than 17 months of intricate legal maneuvers, the battle came down to a test of strength and nerve between resolute executives at two powerful corporations. In the end, neither side was willing to move far enough from its initial negotiating stance to reach an agreement.
Texaco left itself an escape hatch. Officials said that if a settlement was reached soon or a large reduction of the bond granted, then the company could withdraw or suspend the bankruptcy filing. In other words, Texaco could be using its bankruptcy as the ultimate pressure tactic against Pennzoil. Liedtke flew to New York City on Sunday.
Under Chapter 11 of the federal bankruptcy law, Texaco will be allowed to continue normal business operations. Its cash flow could actually improve because it will still receive sales revenue and yet be afforded relief from interest payments on its $9.1 billion in debts. But it could also lose a great deal of business because of uncertainty surrounding the Pennzoil case. Many of the jobs held by the company's 52,000 employees could be threatened. Moreover, Texaco will be under the strict supervision of a federal court. It will, for example, be forbidden to buy major oil reserves or other substantial assets without the approval of Texaco's creditors, or failing that, of the judge. Such restraints could hamstring the planning and undermine the future of a once mighty corporation.