Icahn's $8bn bids forced Phillips Petroleum into a $4.5bn recap to stay independent

In December 1984, T. Boone Pickens' Mesa group — holding 5.7% of Phillips Petroleum — settled its threatened takeover for a guaranteed profit of about $89 million. Phillips agreed on the spot to a restructuring that added $2.9 billion of debt to target $53 a share, an attempt to buy off the raider with its own medicine. That defensive recapitalization immediately drew a larger predator: Carl Icahn.

By February 1985 Icahn held 7.5 million Phillips shares and launched a hostile tender: February 4-6, a $55-a-share offer for all shares — $27.50 in cash plus $27.50 in notes — worth $8.09 billion. The board rejected it, saying Phillips and other major oil companies 'should not be liquidated or busted up for the benefit of speculators and corporate raiders.' Within a little over a week Icahn made a third bid: $60 a share for half the company and debt securities for the rest, about $8.6 billion.

The board's answer was a shareholder vote on its own recapitalization — but the original plan, an $8 billion package with an employee stock ownership plan giving employees up to 39% of the stock, was defeated at the special meeting on February 22, 1985, failing a majority of outstanding shares. Phillips came back with a sweeter package.

On March 4, 1985 Phillips announced both the settlement with Icahn and the new recap. Icahn withdrew his $60 tender for 70 million shares, pledged no takeover attempts for eight years, and was reimbursed up to $25 million in costs. The final recap repurchased 72.5 million shares with securities worth $62 face value — about half the company — raised the dividend from $2.40 to $3.00, issued $300 million of preferred stock, split the stock three for one, and dropped the employee-stock element that had sunk the first plan.

Phillips stayed independent: shareholders got a $4.5bn securities package ($62 face value for half the company), a higher dividend and a 3-for-1 split; Icahn withdrew

The recap was priced against the bid: $62 of face-value securities delivered more to most holders than the arithmetic of Icahn's $55-$60 cash-and-paper offers.

Dropping the ESOP from the final plan removed the legal and political wrinkle that sank the first vote; the sweetened package won where the original lost.

The raider's goal was profit on his 7.5 million shares, so a defined reimbursement (up to $25 million) plus an eight-year standstill gave Icahn a financed exit and Phillips a durable peace.

When a raider bids cash for the whole company, a leveraged recap can only win if its securities are priced against the bid — shareholders must believe the package is worth more than the tender

Phillips stayed independent and carried the recapitalization debt through the rest of the 1980s with its oil and gas portfolio intact — the outcome the board's $4.5bn recapitalization had bought. The episode became a template for the leveraged-recap defense during the raider era: bid, reject, recap, settle.