The MacNeil/Lehrer Report; Conoco Merger and Anti-Trust Implications

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ROBERT MacNEIL [voice-over]: This is how the cartoonist Pat Oliphant of the Wellington Star saw it today: Seagrams with a fast serve to Conoco; Conoco returns to DuPont; DuPont with a backhand cross-court to Texaco; Texaco with a high lob to Mobil. What they are watching is the biggest corporate takeover war in history -- a war for ownership of Conoco. America`s ninth-largest oil company.

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MacNEIL: Good evening. The title might easily be borrowed from the current movie. "The Clash of the Titans." for there has never been a takeover battle involving such industrial giants as are now slugging it out for ownership of Conoco. Never have such vast amounts of money been bid; the latest yesterday an offer from the DuPont Chemical Company worth $7 1/2 billion. Still in the wings as active or potential suitors are Mobil Oil. the nation`s second-largest oil company; Texaco, the third-largest; and Seagram Distilleries, a giant Canadian company. Behind all this activity is the feeling in corporate America that the Reagan administration offers a more permissive climate for takeovers, and a more tolerant anti-trust philosophy. That is symbolized by a statement last month from Attorney General William French Smith that bigness in business does not necessarily mean badness. That philosophy is expected to be tested, especially if one of the big oil companies wins the bidding war for Conoco. Tonight, why do they all want Conoco so badly, and what are the anti-trust implications? Jim Lehrer is off; Charlayne Hunter-Gault`s in Washington. Charlayne?

CHARLAYNE HUNTER-GAULT: Robin, the object of all this high-powered affection -- Conoco -- is the nation`s ninth-largest oil company. It`s subsidiary, the Consolidation Coal Company, is the nation`s second-largest coal producer. The race to take over Conoco started in May when a Canadian company -- Dome Petroleum -- bought 20 percent of Conoco`s stock. The Dome offer unleashed such a flurry of selling by Conoco`s shareholders that it aroused the interest of other companies. Conoco managed to fend off the Dome bid only to be set upon by Seagram, the world`s largest liquor company. Unhappy with Seagram`s offer, Conoco sought a more compatible alliance with DuPont, the country`s largest chemical company. Seagram made a counterbid this weekend, and yesterday DuPont upped the ante. Meanwhile, the fierce bidding war has run up Conoco stock from a low 50 to a closing price today of 87 and 7/8ths, up 1 and 7/8ths. And many Wall Street observers say it`s not over yet. Robin?

MacNEIL: First, let`s examine why all these corporate giants, especially the oil companies, would want to buy Conoco. To discuss that we have Phil Dodge, a vice president of Donaldson, Lufkin and Jenrette Securities Corporation in New York. He specializes in oil investment research. Mr. Dodge, what`s so attractive about Conoco that has so many suitors coming awooing?

PHIL DODGE: The reason that Conoco is the particular target now is that it`s clearly vulnerable to a takeover as signalled by the response to the Dome Petroleum tender offer. Dome tendered for 20 percent of Conoco stock at 65, and 50 percent of the stock was actually offered at that price.

MacNEIL: You mean people who owned the stock -- individuals and large investors -- came rushing out and said we`ll sell you some?

Mr. DODGE: The stockholders responded much more enthusiastically than Dome or Conoco had anticipated, and when 50 percent of the stock was tendered, it became clear then that Conoco would be vulnerable to a takeover.

MacNEIL: Now, why would big oil companies want to buy another oil company like Conoco?

Mr. DODGE: With the recent decline in the price of oil stocks, in the market the price is a much lower percentage of the underlying value of the company. In the case of Conoco, before the Dome tender offer the price was about 50. That was a third of our estimate of the underlying value of Conoco of $147 a share.

MacNEIL: What`s that based on?

Mr. DODGE: That`s based on the present worth of all of their future cash flow from oil and gas and coal production. That is the value to a third party purchaser if he wants to assure a satisfactory rate of return on Conoco`s assets.

MacNEIL: Why would a big oil company -- Mobil or Texaco or whoever -- want to spend all their profits and even borrow heavily at the current rates of interest doing that instead of going out and exploring for new reserves themselves?

Mr. DODGE: An oil company has several options, and it looks at the cost of all of those options. It can drill, as you say. In 1980, we estimate that the cost of adding oil reserves in the United States is about $15 a barrel. Anytime an oil company can add to reserves at a lower cost, that becomes an attractive option. In the case of Conoco, at the current bidding level of about 60 percent of underlying value, we estimate that a buyer would be paying $7 a barrel.

MacNEIL: For the oil that`s known to be in the ground that Conoco owns?

Mr. DODGE: Yes. And so that becomes a tremendously attractive option for them. They can buy reserves at about half of what it costs to find them. And they can do other things: they can buy their own stock -- as Gulf Oil has recently announced it would do. But an oil company looks at all of these alternatives, and any time that they can make an addition to reserves at less than it cost them to go out and drill and find them, that becomes very appealing.

MacNEIL: Assuming this merger goes through, and it kind of sounds as though you believe something will happen here, will there be more, growing concentration -- will there be more mergers in the energy field?

Mr. DODGE: Yes. I think now we have four or five very enthusiastic bidders or potential buyers, and only one seller. So only one of the four or five bidders will be successful. That will leave the other three or four to look at the rest of the field, and see if there are opportunities similar to Conoco.

MacNEIL: And are there? Are there companies -- other smaller oil companies -- vulnerable to takeover?

Mr. DODGE: Well, the medium-sized oil companies a notch below the seven major internationals sell at particularly big discounts from underlying values, and so they are all targets for the same kind of approach.

MacNEIL: Which would you include in those?

Mr. DODGE: In that group of similar size to Conoco would certainly be City Service or Marathon Oil or Kerr-McGee. These are companies that are big enough to have large discounts placed on their stocks by the market, but still small enough to be targets for the large international oil companies like Mobil and Texaco.

MacNEIL: Well, thank you. Charlayne?

HUNTER-GAULT: Putting aside the Conoco deal, the wave of mergers this year is up 60 percent over last year`s record pace. Six deals involving more than $2 billion apiece were either announced or pending or have been completed this year. For some insight into this urge to merge, we have Patricia Scherschel. a business reporter for CS. News and World Report. Ms. Scherschel, what is behind this merger mania?

PATRICIA SCHERSCHEL: Well, obviously, the firms think that buying these other firms is a good investment. Also. I think in recent months, there is a perception that anti-trust enforcement will be more relaxed in the Reagan administration, and therefore, firms have fewer inhibitions about merging. I think that a great many firms think that a lot of companies` stocks are undervalued since the stock market has been in the doldrums in recent years, and these would make good buys. They are -- being undervalued makes the stocks very vulnerable to a tender offer. There are some technical reasons for merging.

HUNTER-GAULT: Let s not get too technical

MS. SCHERSCHEL: Tax considerations. There can be tax benefits to merging. And some mergers beget other mergers. Mergers are often retaliatory. The merger of American Express and Shearson Loeb Rhoades was in large part a reaction to merger of Prudential Insurance Company and the Bache Group Securities Firm.

HUNTER-GAULT: So there`s just a range of reasons, but not the least of which is the perceived attitude on the part of the administration toward the anti-trust laws. The Justice Department seems predisposed to the view that bigness in business is not bad. Does that suggest any way how it might rule on any of the proposed merger partners of Conoco?

Ms. SCHERSCHEL: It really depends on which partner wins Conoco, and if it`s a horizontal merger, say -- one between two oil companies -- there would be much greater scrutiny by the Justice Department.

HUNTER-GAULT: Because of the problem of competition or --

Ms. SCHERSCHEL: There would be a much greater market share. If Mobil or Texaco were to acquire Conoco, it would overnight create a firm that would rival Exxon in size, and that would come under scrutiny by the Justice Department.

HUNTER-GAULT: But if Seagram or DuPont Chemical Company were to win out in the bidding, how would that possibly go?

Ms- SCHERSCHEL: If DuPont were to succeed in acquiring Conoco, then there would probably be less of an anti-trust question. I think the general consensus is that the merger would pass muster with the Justice Department, which has said it will review the merger application.

HUNTER-GAULT: And Seagram, which is a foreign -- Canadian -- company? How is that likely to go?

Ms. SCHERSCHEL: That probably would raise the least problem on an anti- trust basis.

HUNTER-GAULT: Why is that?

Ms. SCHERSCHEL: Seagrams is a foreign firm; it is not in a business that is even close to what Conoco`s is. DuPont and Conoro come closer in business; DuPont would have a use for Conoco`s petrochemical feed stocks. But the Seagram merger would not create any kind of market concentration questions.

HUNTER-GAULT: If the Conoco merger is permitted to go through, briefly, what impact do you see it having on American big business?

Ms. SCHERSCHEL: If the Texaco-Mobil-Conoco, or Conoco merger were to succeed, I think that you`d see probably a great rush toward merger because I think this would be a sign that anti-trust policies have been greatly relaxed. If DuPont acquires Conoco. I think that there would still be an impetus to merge, but not quite as great if a horizontal merger were approved. The Seagram merger would be the third least effective as far as encouraging new mergers.

HUNTER-GAULT: Right. All right, we`ll come back. Thank you. Robin?

MacNEIL: The Senate Judiciary Committee, now chaired by Republican Strom Thurmond, will soon hold hearings on the Conoco merger moves. They are being held at the request of Democrats Edward Kennedy, the former chairman of the Committee, and Howard Metzenbaum of Ohio, former chairman of the anti-trust subcommittee -- which I understand, Senator, has now gone out of existence. Is that correct?

Sen. HOWARD METZENBAUM: That`s correct.

MacNEIL: You are known as a strict enforcer of the anti-trust laws. How do you feel about this spate of mergers in the last year that Charlayne`s just been discussing?

Sen. METZENBAUM: I don`t feel very good about it, but beyond not feeling good about it, I don`t feel that it is in accord with the Reagan administration purported policy. Because the purported policy of this administration is to be pro-free enterprise. And you can`t be pro-free enterprise and at the same time frustrate the competitive forces working in the marketplace. And that`s exactly what this administration is saying they`re prepared to do. We can`t overlook the fact that anti-trust was originally a Republican program sponsored by a Republican senator from Ohio, John Sherman. And it`s come down through the years with great Republican support. I don`t quite understand why they`re turning their back on the whole free enterprise system, and causing competition to be eliminated from the marketplace. I don`t think it`s good for the economy; I don`t think it`s good for the country; and I sure know that it isn`t good for the American consumer.

MacNEIL: To come to the Conoco story for the moment. What particular problems do you have with the proposed mergers in that area?

Sen. METZENBAUM: Well, as I see it, DuPont uses oil and natural gas as a feed stock for about -- in order to produce about 70 percent of its revenues. Now, that would give it a competitive edge -- as a matter of fact, that`s the language used in a recent Newsweek article -- over its competitors. It would assure itself of a source of supply. In addition to having a source of supply, it would have a competitive advantage over its - - persons who are also in the same industry, particularly small businesspersons who would not be able to compete effectively because if you wanted to drive them out of business, all that DuPont would have to do is lower the price at which its Conoco properties are selling its product to DuPont, and that would give it a strong competitive advantage. I just don`t think that`s healthy.

MacNEIL: Do you see that as a violation of the spirit of the anti-trust laws?

Sen. METZENBAUM: It may also be a violation of the laws themselves.

MacNEIL: What about if one of the big oil companies should acquire Conoco? What would your attitude be to that?

Sen. METZENBAUM: That would be worse. See, I`m not one of those who believes that bigness is good, nor do I think it`s bad. I think you have to look at the particular situation. I think you have to see whether or not you`re going to foster competition, or whether you`re going to harm competition. And I believe that two oil companies combining certainly don`t foster competition, and I certainly have questions as to whether or not the DuPont acquisition of Conoco will help in the competitive marketplace.

MacNEIL: How would these mergers affect the consumer, say, in the case of the oil companies?

Sen. METZENBAUM: Higher prices. Every time you eliminate competition, it`s the American consumer that winds up paying more for the gasoline or the products that come from DuPont -- as the case may be. I believe that`s what this whole issue is about. And I think that, unfortunately, this administration which talks about the system working better -- and I support them in that concept, and want them to do well -- but I think that bringing in the new head of the anti-trust department, who has turned his back effectively on the anti-trust legislation, anti-trust litigation, and has practically given his blessing for a spate of mergers throughout the country, is not going to be healthy for our economy. I think it`ll be harmful.

MacNEIL: Well, thank you, Senator. Charlayne?

HUNTER-GAULT: Now for another view, we go to Robert Bork, a former solicitor general, and a noted authority on anti-trust law. He is currently a partner in the Washington office of Kirkland and Ellis law firm. Mr. Bork, you`ve been advocating a change in anti-trust enforcement similar to that of the Reagan administration. Why is that?

ROBERT BORK: Well, a lot of anti-trust rules were heavily regulatory, and were based upon no particular good economics. So that they were adding costs to industry and hurting consumers. I think this administration has a policy -- which I wouldn`t call relaxed. I would call it correct -- of letting the market work more. And letting the market work includes mergers as well as other forms of business practice.

HUNTER-GAULT: Well, specifically, how were the anti-trust laws causing higher costs?

Mr. BORK: Oh. in the concern with various forms of vertical arrangements, distribution practices, vertical mergers --

HUNTER-GAULT: What do you mean by vertical mergers?

Mr. BORK: Oh, a vertical merger is one between a supplier and a customer. And by stopping that kind of merger and other variety of practices of a vertical nature, and other things, they prevented business from realizing efficiencies that they could otherwise realize. And did so without achieving any increase in competition.

HUNTER-GAULT: What`s your reaction to Senator Metzenbaum`s statement that the administration is turning its back on the free enterprise system -- that indeed --

Mr. BORK: Well, I don`t think so. I think Attorney General- -- Assistant Attorney General Baxter has a very good understanding of the free enterprise system, and that he is allowing competition for assets and for companies to take place -- within limits -- in a way that will be very good for consumers. The oil industry, we must understand, is less concentrated than the average American industry. So that there`s really no threat to competition from these mergers that I can see.

HUNTER-GAULT: That is if the mergers take place between the oil companies?

Mr. BORK: If the mergers take place between the oil companies or any other mergers we`ve discussed.

HUNTER-GAULT: What about his point that the mergers will be harmful to the public -- that they will bring higher prices.

Mr. BORK: I don`t see any possibility of higher prices unless you got down to about two or three oil companies, and we have many, many oil companies. I think that probably the net result would be lower prices in the sense that you`d have more cost-effective allocation of resources and achievement of resources.

HUNTER-GAULT: So in your view, then, bigness in business is good?

Mr. BORK: Bigness -- no. It depends upon letting the companies make their own judgments. Maybe sometimes being small is better, sometimes being big is better, but one thing that is always irrelevant is absolute size in dollar terms. The only thing that is relevant to competition and to consumers is how much control -- share of the market -- the merged firms have. We`re talking about mergers here that don`t really get us anywhere near a dangerous range.

HUNTER-GAULT: Will a Conoco merger with any of its present suitors, in your view, pass muster with existing anti-trust laws?

Mr. BORK: I would -- -I would hope so. Now, in anti-trust, enforcement policy is as much a part of the law as prior court decisions because each administration brings its theory of the marketplace -- what it requires -- to office with it. I would hope that any of these mergers as we now understand them would pass muster because I don`t see any danger to competition in any of them.

HUNTER-GAULT: Do you see an epidemic of mergers on the horizon?

Mr. BORK: I think what you`re seeing is a spate of mergers because for a long time mergers that should have taken place -- in the consumer interest as well as in the business interest -- were pent up by fear of anti-trust enforcement which was much too strict. And so now you`re probably getting those mergers that were deferred or not made in a shorter timeframe, and it looks like a spate.

HUNTER-GAULT: But that`ll taper off at a certain point?

Mr. BORK: I would think so.

HUNTER-GAULT: All right, thank you. Robin?

MacNEIL: Senator Metzenbaum, you heard what Mr. Bork just said. We`re getting a lot of mergers now because much too strict enforcement of the anti-trust laws has pent up a lot of mergers which should have taken place. What do you think about that?

Sen. METZENBAUM: Well, first of all, I don`t agree with that factually. I think you have mergers between corporations when one of two things occurs: either they have too much cash and they want to go out, and they think they can increase their earnings per share by buying a company; or they can do it on a tax-free exchange of stock. Very seldom do I see mergers taking place because they think that it adds to the efficiency. In fact, there are very few mergers that you can point to where there have been increased efficiencies that resulted from the mergers having occurred. And I don`t think that will happen. In this situation, you have the number-one chemical company and the number-nine oil company in the country going together. And I don`t believe that DuPont can teach Conoco how to operate, nor do I think Conoco can teach DuPont how to operate. I just don`t think that you`re adding to any thing called more effective cost allocation, as Mr. Bork has suggested. I just don`t think that`s the reality in life, and I came from the business world -- from one of the corporations that had done a lot of acquiring and merging, and I never saw anything such as that being more efficient by reason -- what it did was add to their earnings per share.

MacNEIL: What do you say to that, Mr. Bork? There`s a practical businessman -- or former business man -- saying it doesn`t add to efficiency.

Mr. BORK: Well, I know, but I can get practical businessmen to talk on both sides of the issue. But the Senator. I think, just contradicted himself. because a moment ago he said that this merger would probably create a competitive advantage. And if you ask yourself what a competitive advantage is, it turns out to be a more cost-effective way of doing business. In the DuPont/Conoco situation, I understand that Conoco has a variety of resources such as coal which DuPont can use in its new technology of chemicals based upon coal. So that there is- -- there does seem to be an efficiency there.

Sen. METZENBAUM: Well, I would agree that you have a competitive advantage in being able to buy cheaper from the company that you own, but I`m talking about competitive advantage from the stand -- I`m talking about what`s achieved for the economy. Can you effectively cut costs by putting the companies together? Can you eliminate management? Can you do something in the work force that makes it better for the country? Don`t forget. This administration is talking about production incentives, about being able to do more with the technology of the country. As a matter of fact. I think this is going to hurt in that respect because DuPont`s going to have to use its resources -- it`s borrowing $3 billion to buy Conoco. They could more properly be using those dollars for the research and technological improvements in developments that they`ve had over a period of years. And so I see no real gain to the American economy coming about by reason of some of the mergers that are taking place at the moment, and some that are on the backboards.

MacNEIL: Mr. Bork. you believe that refusal to permit a lot of mergers, say. under the Carter administration, the enforcement of what would be Senator Metzenbaum`s time as chairman of the anti-trust subcommittee, has actually been harmful to American business. Is that correct?

Mr. BORK: Harmful to American business and therefore to American consumers.

MacNEIL: How? Could you spell that out? How has it been harmful to have the strict enforcement of the anti-trust laws there has been in the last few years?

Mr. BORK: Well, I think Mr. Dodge put his finger on it when he said that these companies, as they try to grow -- by internal growth or by merger or by some other way -- try to put together new technologies, management techniques, and so forth. They have various options, and they choose the most cost-effective option. There is simply no point in forcing a company into a higher-cost option -- such as internal growth or something else - - when they can achieve that result at lower cost, and that cost saving is a benefit not only to the business, but to our economy as a whole because we don`t want business doing things inefficiently at high cost.

Sen. METZENBAUM: Robin, let me point out something -- that all of these oil companies that are not acquisition-minded, or being acquired, have been telling us for years that they needed the extra dollars in order to go out and develop oil, to develop natural resources. But instead of that, they`re using their money, and they`re going to the bank to borrow on their reserves, in order to acquire other companies. That has no special value for the economy. And I think that what we ought to be doing is saying to these oil companies. "You ought to be using your dollars to produce more oil for the country. That`s more in the nation`s interest; and that`s one of the reasons we`ve given you so many tax advantages."

MacNEIL: Well, that wouldn`t be application of the anti-trust laws, would it? That would be another political pressure on them.

Sen. METZENBAUM: I agree with you. Robin. That would not be anti-trust laws, but I think that it`s an overriding, or at least subliminal kind of concern that all of us must have as we see oil companies amassing billions of dollars and now wanting to use those dollars for the purpose of making acquisitions. I know that Texaco -- Mobil is thinking along these lines at the moment. We know that Sohiu has used their money along that line, and others have done the same.

MacNEIL: Mr. Bork, would you say that what the Reagan administration is doing in terms of administering anti-trust law at the moment amounts to a substantial revision of antitrust?

Mr. BORK: I don`t think it amounts to a revision of anti-trust as properly understood -- as a guarantor of competition. In fact, I think it`s a great improvement on anti-trust as properly --

MacNEIL: A substantial change, anyway?

Mr. BORK: It`s a change, I think, in the way anti-trust was administered in some prior administrations, and a change that`s all to the good.

MacNEIL: Well, thank you. Charlayne?

HUNTER-GAULT: Ms. Scherschel, let me just ask you, what`s your sense of what happens next on the Conoco front?

Ms. SCHERSCHEL: Well, it depends on whether someone comes in with a bid higher than DuPont`s bid. At present it looks like DuPont has it unless DuPont`s shareholders turn it down at a stockholders meeting. I think it is to be scheduled in August. If a new bid comes in, you go back to square one, and Conoco mulls it over, and wait to see whether someone else comes in.

HUNTER-GAULT: Well, there are all these people -- ? all these companies waiting in the wings -- like Texaco, Mobil, and so on. What`s the story with them?

Ms. SCHERSCHEL: I think Texaco and Mobil are waiting to see whether Seagram counters DuPont`s bid, and if DuPont says okay, we`re out of the running, then Mobil or Texaco will make a bid. And if Mobil doesn`t make a bid, then Texaco might make the bid. I think Texaco and Mobil will look to each other to see who makes the bid.

HUNTER-GAULT: Mr. Dodge, do you have any insight into that?

Mr. DODGE: I think DuPont has the edge now because Conoco management has agreed to merge with them. And in the agreement is a provision that DuPont can buy 16 million shares of unissued Conoco stock, which gives them an advantage in the mathematical battle for shares. But I do expect Mobil to make an offer, and that will introduce a new chapter in the script. Texaco may very well hold back and see if DuPont and Conoco fall through for some reason. I don`t think that they will become active again unless that happens.

HUNTER-GAULT: Well, how long do you think it`s going to take for the completion of this saga?

Mr. DODGE: I think it will take several more weeks because at the moment both Seagram and DuPont will be accumulating stock, and so they will, after the end of the tender periods, count the shares and plan their next step, sec what their strategy should be at that point.

HUNTER-GAULT: Ms. Scherschel. so you see it`s taking several more weeks?

Ms. SCHERSCHEL: It could.

HUNTER-GAULT: Do you have any insight into that. Senator?

Sen. METZENBAUM: I don`t, but I certainly hope that they don`t finalize this matter before the Senate committee has an opportunity to conduct a hearing and to explore it quite fully.

HUNTER-GAULT: We have to leave it at that. Thank you. Robin?

MacNEIL: Yes. Thank you very much Senator Melzenbaum, Mr. Bork. Ms. Scherschel. in Washington, and Mr. Dodge, here. Good night, Charlayne.

HUNTER-GAULT: Good night, Robin.

MacNEIL: That`s all for tonight. We will be back tomorrow night. I`m Robert MacNeil. Good night.