A Week on the Wild Side

(2 of 3)

The breakdown of the Gulf-Cities Service deal was potentially the most dangerous threat to Wall Street. After Gulf first made its acquisition bid in June, a flock of investors hoping for a quick profit bought some 27 million Cities Service shares. Two weeks ago, however, rumors began swirling that the giant oil company was having second thoughts about the acquisition. By the time Gulf renounced the deal after the market closed on Friday, Aug. 6, the price of Cities Service stock had already fallen by one-third, to 37¼.

After Gulfs announcement, Cities Service shareholders faced a long, agonizing weekend. Says William LeFevre, strategist for the Purcell, Graham & Co. investment firm: "People were afraid that the stock would lose a third of its value and open at $25 or lower." Cities Service Chairman Charles Waidelich fumed at Gulf: "I am outraged. This is the first time something like this has happened between two major U.S. corporations." Waidelich called a meeting of his board of directors on Sunday afternoon, Aug. 8. After 31/2 hours of discussion, the directors voted to make an all-out effort to find a new partner.

On Monday morning, Aug. 9, traders at brokerage houses were warned over office intercoms and at emergency meetings to prepare for a hectic, perhaps catastrophic week. "Everybody was scared to death," says Barton Biggs, chief market strategist at Morgan Stanley. The New York Stock Exchange prolonged the tension by postponing the start of trading in Cities Service. The scene around Post No. 4, where Cities Service shares are bought and sold, was pandemonium. Says one trader: "Every time word went out that the stock was about to open, 50 gesticulating sellers surged forward." But the stock did not open until 3:25 p.m., only 35 minutes before closing time. In a convulsive frenzy during that brief period, 2.8 million shares of Cities Service were sold. The stock finished the day at 30⅜, down 6⅞.

Heavy trading continued all week, but the price, after its Monday plunge, stabilized. Hopes that a new merger partner would soon appear helped hold up the value of the stock. Cities Service declared an open house at its Manhattan offices and invited potential suitors to come by to peruse confidential company data. Waidelich was actively wooing all the largest oil companies, as well as several non-oil firms. Rumors flew that Phillips Petroleum Co. and the Union Pacific Corp. were showing interest.

Starting last Thursday night at the Carlyle Hotel in New York City, Cities Service officials huddled in meetings with Occidental Chairman Armand Hammer and his top lieutenants. By just after lunch on Friday, they had reached the outline of an agreement. At 2:59 p.m., trading in Cities Service was suspended with the price at 33¼. Expectations of an offer helped rally the entire market. After being down all week, the Dow Jones industrial average gained 11.13 points on Friday to finish at 788.05. An hour after the market closed, Cities Service announced the Occidental bid.