T. Boone Pickens: Corporate Raider, Oil Tycoon, and Philanthropist

Introduction

"The Business Roundtable says takeovers lead to job losses, but the Roundtable is only against hostile takeovers. Friendly deals are okay, regardless of how much debt is taken on and how many jobs are lost. The Business Roundtable says takeovers are hurting the U.S. economy, yet 76% of its members have carried out takeovers in the last three years. How hypocritical can you get? Over 125,000 jobs have been lost recently by the three biggest U.S. companies, none of which is threatened by takeovers…" (T. Boone Pickens, 1988).

T. Boone Pickens is among the best-known corporate dealmakers in America. His reputation was established in the 1980s when he became known as one of the top corporate raiders in U.S. business circles. This paper reviews his life, the years when he was building Mesa Petroleum, the takeovers he engineered, the money he has given philanthropically, and some of the controversies he has been involved in.

Biographical Background and Early Career

Pickens was born on May 22, 1928, in the small town of Holdenville, Oklahoma. He was an only child; his father was Thomas Boone Pickens, Sr., and his mother was Gracee (Molonson) Pickens, according to the Gale Encyclopedia of U.S. Economic History. His father, who claimed to be a distant relative of the noted frontiersman Daniel Boone, was at the time of Pickens' birth an attorney employed by Phillips Petroleum Company in its land acquisitions department. In an interview with Time magazine in 1985, Pickens said he was "very fortunate in my gene mix… the gambling instincts I inherited from my father were matched by my mother's gift for analysis" (Gale, 1999, p. 1).

When the family moved from Oklahoma to Amarillo, Texas in the mid-1940s, Pickens played basketball in high school and, according to Gale, excelled at the sport. After high school he attended a university on an athletic scholarship, but after breaking his elbow and losing his scholarship, he transferred to another institution. He earned his bachelor's degree in geology in 1951 and followed his father's footsteps into the oil business (Gale, 1).

Pickens' job with Phillips was as an oil geologist, but in 1955 he left the company "because he found the work boring and felt stifled by the company's conservative style" (Gale, 1). He boldly started his own company, Petroleum Exploration Company, investing $2,500 of his own money and securing a line of credit worth $100,000. According to the New York Times' reporter Lydia Chavez, as quoted by Gale, Pickens had "an uncanny ability to find oil and gas" (Gale, 1).

Rather than becoming involved in the infrastructure that typically accompanies oil discoveries — refineries, pipelines, and service stations — Pickens simply discovered oil and gas reserves and sold those discoveries to existing companies. By 1964 he was knowledgeable and well-capitalized enough to form Mesa Corporation, which he headquartered in Amarillo, Texas. By 1969 he began acquiring other companies; he purchased Hugoton Production Co., whose holdings included a vast natural gas field in Texas, and in 1973 he added Pubco Petroleum to Mesa's portfolio. The following year, however, Pickens lost $19 million in an ill-fated attempt to "diversify into cattle" (Gale, 1).

Throughout this period, Pickens held the then-revolutionary view that the most important responsibility of a CEO was to "create wealth for his shareholders and that the failure to do so might well result in the loss of his or her job" (Gale, 1).

In his memoir, Pickens recalls his early years vividly. He remembers his grandmother's large vegetable garden and describes how her vegetables were served each evening at supper; meat was only occasionally included, "but we were never hungry" (Pickens, 2009, p. 7). His mother Grace was a "disciplinarian" who instilled "important lessons in me early on, which prepared me for the challenges ahead." She served as manager of the Office of Price Administration, responsible for rationing gasoline and other goods during World War II. Pickens notes that if she said she would do something, "you could consider it done" (Pickens, 7).

Pickens began working by mowing lawns as a young boy, and by the age of twelve he had a paper route. He started with twenty-eight houses to deliver to — the smallest paper route in Holdenville — earning a penny per paper. Displaying his entrepreneurial spirit early, he acquired every additional route that came open. After talking his supervisor into letting him keep adding routes, he ended five years later with 156 papers to deliver and had saved nearly $200 (Pickens, 8). He jokes that this expansion was his "first experience in the takeover field: expansion by acquisition" (8).

Mesa Petroleum and the Corporate Raider Years

On one occasion he found a wallet while delivering papers and, noting the owner's name and address, returned it. The man gave him a dollar as a reward. He was thrilled, but his mother and grandmother — both sitting on the porch when he announced his good deed — were not impressed. They sent him back to return the dollar: "You are not going to be paid to be honest," his grandmother insisted.

When he first worked at Phillips he felt he was working for "a big and sluggish army of bureaucrats" and hated the rigid routines he was obliged to follow. A bell rang at five minutes before eight a.m., signaling workers to their desks. Other bells marked different duties and locations throughout the day. Management discouraged staying past 5 p.m. ("I once got reprimanded for staying until six"), and worse yet, "paranoia was rampant," Pickens recalls (Pickens, 10). What really bothered him was "the waste" and the fact that management would not listen to or even consider "alternative ideas to save the company money or find more oil" (10).

In the 1980s Pickens began what he is now famous for: buying and trading stock in petroleum companies through a series of "hostile takeover bids" (Gale, 2). Some of his tactics were "not entirely aboveboard," as the Gale article notes. He would accumulate a massive amount of cash by selling off assets at precisely the right time — a practice known as "greenmail" — which involved buying large blocks of a company's stock as though he were preparing a takeover. In reality, he was positioning himself to sell those shares back "at an inflated price so that the company can thwart the apparent buyout attempt" (Gale, 2). The first time he used this strategy was in May 1982, when he attempted to purchase a controlling interest in Cities Service Company, a medium-sized oil firm (Gale, 2).

Pickens' efforts triggered a "fierce bidding war" among other oil companies, which drove Cities Service's stock price sharply upward. Although he did not ultimately acquire Cities Service, he had "strategically positioned Mesa to realize over $31 million in profit" when Occidental Petroleum made the winning offer and acquired the firm.

In his memoir, Pickens offers an insider's account of his first corporate raid. He wanted to buy Hugoton Production Company, a firm "fifteen times bigger" than Mesa, and tried to convince Hugoton's president that a merger would benefit both companies. When management declined, Pickens had what he describes as a "life-changing moment" in the shower that evening: "I made up my mind that I was going to try a takeover, one that would set us up for even bigger and bolder moves down the road" (Pickens, 15). He purchased $1.3 million worth of Hugoton stock and made "an unsolicited offer of Mesa securities for Hugoton stock, one share of a newly created Mesa preferred stock for each share of Hugoton common stock" (15). Within weeks his moves caused the market value of Hugoton to rise from $77 million to $137 million — "an all-time high" (15).

At that point Pickens held a 17% ownership stake in Hugoton, making him the largest shareholder. When Hugoton attempted to merge with Reserve Oil and Gas Company — a company Pickens considered a "dog" — he rallied shareholders to vote against the merger. The vote succeeded. Before long Mesa owned 28% of Hugoton, and in 1969 the merger with Hugoton was completed. The lesson he drew was clear: do not back down, and leverage your own company's stock whenever necessary to become a controlling shareholder in the target company.

In his first year with Mesa (1964), Pickens had 239 investors, issued 420,052 shares of Mesa stock, and the company was "debt-free," earning a $435,310 profit from $1.5 million in gross revenue (Pickens, 13). By 1968, four years later, revenue had ballooned to $6.2 million, with profits of $1.4 million.

Pickens was known as a supremely successful corporate raider — "king of the corporate raiders" — until his power began to be checked by the courts and by target companies. In 1985, for instance, he tried to take over Unocal Corporation, but Unocal responded with a unique stock buyback plan made available to every investor except Pickens. He sued in Delaware courts and won at the lower level, but the Delaware Supreme Court overturned that ruling, holding that Unocal had every right to "single out corporate raiders and treat them differently than other shareholders" (Gale, 2).