A Week on the Wild Side

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The failure of the Gulf-Cities Service merger sends Wall Street into a spin

Aftershocks from a collapsed merger. Surprise bankruptcies. Gyrating stock prices. A startling new takeover bid late on Friday. Even to the most seasoned Wall Street veterans, last week was wild.

At the close of business on the previous Friday, Aug. 6, Gulf Oil Corp. had dropped a short-fused bomb on the stock market. Citing antitrust objections by the Federal Trade Commission, Gulf abruptly pulled out of an agreement to acquire Tulsa-based Cities Service Co., the 19th largest U.S. oil firm, for $5 billion, or $63 per share. When trading opened last week, the price of Cities Service shares had dropped to $30. Scores of brokerage firms and speculators who had bought huge chunks of the stock for prices as high as $56 were staring at the possibility of losing perhaps $700 million. Hardest hit were several smaller firms that specialize in speculating on merger deals, a daring practice known in the trade as risk arbitrage (see box).

At the end of the nerve-racking week, news flashed across Wall Street tickers that Occidental Petroleum of Los Angeles, the twelfth largest U.S. oil company, had bid to acquire Cities Service for an average price of $41.67 per share. Cities Service announced that it would consider the offer at a special meeting of its board of directors early this week but also said that it was still talking to other major companies about possible merger deals. Though far less generous than Gulfs original bid, the Occidental offer could reverse more than a third of the losses that investors have sustained on Cities Service stock. Moreover, brokers hoped that this new development would spark higher bids for Cities Service from other companies.

Occidental's action, plus a drop in the Federal Reserve's discount rate from 11% to 10.5% and the prime rate by some leading banks from 15% to 14.5%, provided an upbeat ending to a gloomy week. The financial community had earlier been rocked by the sudden bankruptcy of Lombard-Wall, Inc., a New York City firm that specialized in trading government securities. Though Lombard-Wall had only 55 employees, it had run up staggering debts, including $45 million owed to Chase Manhattan Bank. Chase was already reeling from an after-tax loss of $117 million that resulted from its dealings with another government bond dealer, Drysdale Government Securites, which went bankrupt in May. The reasons for Lombard-Wall's problems were unclear, but one possible explanation was that the firm had guessed wrong on the direction of interest-rate movements and sustained heavy trading losses.

On the same day that the news about Lombard-Wall broke, Colin, Hochstin Co., a New York City brokerage firm, announced that Justin Colin, one of its partners, had filed a personal bankruptcy petition. He had lost heavily on investments in two small West Coast airlines that went out of business last year. The troubles of Colin and Lombard were new evidence of the current fragility of financial markets.