Carl Icahn recently wrote an open letter to shareholders of Occidental Petroleum (OXY 0.21%) discussing his disagreement with the Anadarko acquisition and management behavior in general. In particular, he suggested that Occidental might have bought Anadarko as a defensive maneuver in order to keep Occidental from being acquired. Icahn wrote:
The answer is simple: We believe that [Occidental CEO Vicki] Hollub, [Occidental Chairman Gene] Batchelder and the rest of the Board were fearful that OXY would be acquired. We believe they were focused on protecting their jobs and viewed the Anadarko transaction as a defensive maneuver that allowed OXY to be the acquiror and not the acquired. As a result, they decided to risk stockholders' capital, instead of protecting it, which is their duty. If we are right, which we believe we are, these actions are unconscionable under any measure. If, on the other hand, we are wrong, then we call upon Hollub and Batchelder to publicly and clearly state whether or not OXY was approached as a possible acquisition target? It's a very simple question –- one that management should address on the February earnings call. Stockholders deserve to know.
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Was there a serious approach?
What is the likelihood that Occidental was approached by a buyer and never disclosed it to the market? I used to work in merger arbitrage for a couple of hedge funds, so I thought it might be interesting to lay out how a merger arbitrage pro would look at the situation. Is there anything to do with Occidental?
First and foremost, company management and the board have a fiduciary duty to maximize shareholder value, even if it ends up costing them their jobs. If a bona fide approach was made to Occidental, management has a duty to disclose it. However, an approach can mean many things. For example, if a company calls management and inquires about Occidental's willingness to sell, that probably wouldn't require a disclosure, particularly if it goes nowhere. This would be common in an instance in which the buyer is only interested in a friendly deal. If Occidental management says the company is not for sale, the buyer might simply accept that answer and leave it at that. There is nothing really to disclose -- no offer letter, no price, nothing.
The buyer's silence
The lack of anything comment from the buyer indicates that nothing substantial was offered. Generally speaking, buyers expect to hear from companies that they are not for sale. That is nothing more than standard negotiating language. The buyer expects that answer. Part of management's duty is to get the best possible price for shareholders, and that means not caving at the first bid.
If a buyer puts the offer in writing and it gets rejected, then the buyer might force the issue by disclosing its interest via a press release (often called a "bear hug" letter). The letter would say that Company ABC wants to buy Company XYZ, but XYZ refuses to negotiate. Company ABC is willing to buy XYZ for $X per share. The stock would then rise typically well above the $X-per-share offer, and the arbs would pile into the stock and handicap what the ultimate price will be.
The change in shareholders' equity would put pressure on XYZ management to enter negotiations. After that, the buyer could continue to try and negotiate a friendly deal, or it could make a hostile offer.
Is Icahn just trying to chum the waters?
Occidental stock has been struggling since the company won the bidding war with Chevron over Anadarko. The stock is down 28% since May 6, when Occidental's offer was accepted. Things have been rough in the oil patch in general, but Occidental has severely underperformed the overall sector, at least compared to the S&P SPDR ETF (XLE 0.41%), which is down 15% over the same time period. Carl Icahn might be trying to see if he can smoke out a buyer with his open letter, but given the behavior of Occidental's stock since the letter, arbs are putting very little faith in the idea that anything serious is out there.
