Uncharted Waters

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u downplays the initial discourse with Williamson, saying he was simply talking with someone his company had done business with in the past, and the topic of a possible merger came up only briefly. But the first time Chevron's CEO, David O'Reilly, spoke to Williamson about a possible merger—just weeks after Fu's conversation with Unocal in December—the Chevron chief was politely rebuffed, according to SEC documents. If Unocal was going to be sold, it appears that CNOOC had already been given first dibs.

O'Reilly, however, was not dissuaded. He wanted to expand Chevron's footprint in Asia. Unocal owns valuable production and distribution facilities and has a stake in oil and gas reserves in Thailand, Indonesia and Burma. On Feb. 7, Williamson told O'Reilly that he had been approached by others—Italy's Eni, a partly state-owned oil and gas company, had also expressed interest at this point—and that Unocal's board would evaluate any and all offers. That's what O'Reilly had wanted to hear: Unocal was now officially in play.

Two weeks later, O'Reilly convened a meeting of Chevron's board, which received a detailed briefing on Unocal. On Feb. 23, the board gave its go-ahead to him to pursue a deal. But in early March, Unocal's board rejected Chevron's initial offer—an all-stock deal worth less than $60 per share. "They wanted some cash on the barrelhead and knew CNOOC would be coming forward with a cash bid," says a banker who advised Unocal.

In less than a month, Fu intended to do just that. But by late March, he still hadn't informed his directors. "He was treating his own board as an afterthought," says one source close to the outside board members. "It was very much the China of 20 years ago in the way the directors were treated initially—where the boss decides and the board just rubber-stamps everything. Why were they treated that way? I don't have a clue."

On March 28, Unocal CEO Williamson again spoke to Chevron's O'Reilly, telling him that he was expecting formal bids from both CNOOC and Eni in the next few days, SEC documents reveal. He also said that if Chevron wanted to get back into the game, it should make an improved offer before Unocal's board reconvened two days later. O'Reilly, again with his board's backing, complied, coming up with an improved all-stock deal.

Now the ball was in CNOOC's court, and Fu, by all accounts, was confident as his board gathered in Hong Kong. He did not see the rebellion coming, says a banker close to CNOOC. Three key outside directors—former Shell Chemicals CEO Evert Henkes, former Swiss ambassador Schurtenberger, and Courtis of Goldman Sachs—all raised pointed questions at the meeting. According to sources with knowledge of the meeting, Schurtenberger—presciently, as it turned out—questioned whether the company was prepared for what was likely to be a hostile U.S. political reaction to the deal. Henkes wondered about the debt load that CNOOC would have to take on to finance the transaction—the firm is seeking to borrow about $16 billion. He asked whether a partner might be brought in to absorb some of the risk. (This was something Haier, a large Chinese appliance company, did, by turning to a U.S. private-equity firm as its partner in making a bid for Maytag last month.)