On this day in economic and financial history…
The largest civil-damage award in business history was first rendered in 1985 in the case of v. Pennzoil. However, it was far from certain that the $10.53 billion judgment would stand on appeal — until, on Feb. 12, 1987, a Texas court of appeals upheld the original $7.53 billion award for actual damages and reduced punitive damages from $3 billion to $1 billion. Texaco was on the hook for $8.53 billion, an amount far exceeding its cash on hand. The source of Texaco’s problems, as is often the case, began with a business deal that went very, very wrong.
Three years earlier, the chairman of privately held Pennzoil and the son of Getty Oil’s founder had agreed to Pennzoil’s offer of $110 per share for 43% of Getty Oil in a preliminary $5.3 billion merger agreement. Less than a week after reaching this deal, Getty’s board approved a deal with Texaco instead, which had jumped in with a $10.2 billion offer for the entire company. Pennzoil sued Texaco for interfering with what it felt was a legally binding contractual agreement, and the Texas courts twice agreed. The verdict pushed Texaco into bankruptcy two months later, making it then the largest company in U.S. history to seek bankruptcy protection. As Martin Klein of the American Bar Association’s bankruptcy subcommittee said at the time, “Pennzoil is in a better position [after the verdict] than it would have been if the merger had gone through.”
A year later, bold activist investor Carl Icahn of Icahn Enterprises, L.P. (NASDAQ:IEP) brokered an initial $3 billion settlement between the two parties that allowed Texaco to exit bankruptcy. This wasn’t altruistic: Icahn, who had formed his company at the same time the courts decided Texaco’s appeal, owned nearly 15% of the oil company’s stock and made a killing off of its post-bankruptcy rebound. Texaco and Chevron Corporation (NYSE:CVX) merged in 2001, and Texaco learned its lesson the second time around — no one felt slighted enough by that deal to sue.
Step into my FedEx Corporation (NYSE:FDX) Office
On Feb. 12, 2004, FedEx Corporation (NYSE:FDX) made its big move into the retail space by finalizing an acquisition of privately held Kinko’s for $2.4 billion. The shipping giant had big plans to create a network of linked one-stop stores for business printing and shipping, which must have been at least in part a response to rival United Parcel Service, Inc. (NYSE:UPS)‘s acquisition and rebranding of the similarly positioned Mail Boxes Etc. three years earlier. At the time, Kinko’s had about 1,200 locations to the UPS Store’s roughly 3,000, so FedEx had a little bit of catching up to do.
FedEx initially planned to maintain the Kinko’s name, but after four years of rough going, the company decided to rebrand its retail stores as FedEx Office, which resulted in a one-time write-off of almost $900 million. The growing irrelevance of print services in an era of cheap and nearly ubiquitous printers and copiers, compounded by the difficulties of operating through the Great Recession, forced FedEx to shutter its Office locations in Australia, Mexico, China, Japan, and the United Kingdom. Despite these setbacks, FedEx Office now maintains more than 1,900 interconnected locations — still a far cry from the UPS Store’s 4,700 franchises.