Smith Sells Back Stock to Gearhart Industries for $80 Million in Cash

One of the longest and most expensive corporate takeover battles in U.S. history ended Monday when Smith International Inc. of Newport Beach and Gearhart Industries Inc. of Fort Worth jointly announced an $80-million cash settlement.

The agreement, reached after four months of negotiation, was approved unanimously by the boards of directors of both companies and puts an end to Smith’s 11-month battle for control of Gearhart, a Texas high-technology oil services company.

The settlement will return to Smith, which makes oil drilling equipment, about half of the $163 million that it paid for its 5.3 million shares of Gearhart. In return, Gearhart will be freed of court restraints associated with the battle and recover control of its own destiny.

Each company agreed that neither would buy shares of the other for 10 years, and both will drop all lawsuits filed against the other in Texas and California courts.

Battle Cost Millions

The takeover battle not only cost both companies millions of dollars but caused their stock prices to plummet at a time when the market for oil drilling equipment already has been depressed. About $16 million of Smith’s $37 million in interest expenses last year were related to debts incurred in buying Gearhart stock. Smith’s short-term debt increased to $140 million in fiscal 1984 from $69 million in fiscal 1983, according to Smith officials. Because of the takeover battle, Smith has not released its earnings for 1984 but has predicted a loss.

Some industry analysts believe that the heavy borrowing has left Smith vulnerable to a takeover itself. Such rumors have been circulating on Wall Street but no bid has been made.

Smith said it wanted to acquire Gearhart’s technology in order to pioneer a new line of “smart” oil drilling tools. The two companies had been discussing possible business combinations for nearly 20 years, but nothing definitive had emerged.

Under the agreement, Smith will sell its Gearhart shares back to Gearhart or its investment banker, New York-based Drexel Burnham Lambert Inc. In the next week or so, Drexel plans to register the sale of the shares with the Securities and Exchange Commission, according to a Drexel spokesman. After the Gearhart shares are sold, Smith is expected to receive about $15 a share. It had paid between $21 and $31 per share.

‘Fair Settlement’

“I think under the circumstances, it’s a fair settlement that allows both companies to get on with their business,” Jerry Neely, Smith’s chairman and chief executive, said in an interview Monday. Neely declined to say how much Smith has spent fighting for control of Gearhart except to say that “it’s been an expensive proposition of time and effort.”

Smith, which employs about 2,000 people in four divisions in Orange County and about 8,000 worldwide, has been cutting back its work force in the wake of a slump in oil drilling equipment sales. It recently reduced its corporate staff by a third.

“I just woke up from this damn nightmare,” said an elated Marvin Gearhart, chairman and president of Gearhart Industries, in a telephone interview. “It’s good for everyone. I feel wonderful.”

Smith’s stock, which closed at $19.625 a share on April 30, 1984, the day Smith filed its tender offer for control of Gearhart, closed Monday at $11.625, down 25 cents on the New York Stock Exchange. Gearhart stock, which stood at $30.25 on April 30, 1984, closed Monday at $11.50, up 12.5 cents on the Big Board.

Gearhart, who said he never doubted that he would win the battle, said the company spent about $7 million in legal and consulting fees to remain independent. Last July, Gearhart purchased Geosource Inc., a Houston drilling services company, from Aetna Life & Casualty Co. of Hartford, Conn. The $318-million cash-and-stock deal, part of Gearhart’s defense against Smith, effectively gave Aetna a 38% stake in Gearhart and placed friendly Aetna directors on Gearhart’s board. Geosource, a seismic services company, is bigger than Gearhart, with about 8,000 employees and $500 million in assets. Gearhart employs about 5,000.

“It may take us a couple of years to prove what a good deal it is,” said Gearhart, who has until now been prohibited by a federal court order from making major changes at the Houston company.

The lengthy battle, which securities analysts say is the longest and most expensive in U.S. business history, began in October, 1983, with Smith’s friendly purchase of a 3.64-million-share block of Gearhart stock for about $113 million. At the time, Marvin Gearhart said he welcomed Smith’s purchase, saying he looked forward to possible business combinations. But, by March, as Smith began to buy more Gearhart shares, Gearhart said he asked Jerry Neely to stop buying the shares and Neely refused.

In mid-April, Gearhart accused the Newport Beach company of launching a “creeping merger” and filed suit in a Fort Worth federal court to stop Smith from acquiring more Gearhart stock. Smith filed countersuits, and the acrimonious battle was under way. Despite the controversy, about 6.6 million Gearhart shares had been tendered to Smith, which continued to extend its tender offer while negotiations continued.

Several settlements were discussed, including Gearhart giving Smith some assets plus cash, according to one analyst. He said Gearhart tried to sell the Smith block directly to a pension fund and others, but the months of discussions finally led to a total cash settlement, according to sources close to the negotiations.

Monday’s announcement was the ideal birthday present for Michael Brown, a Drexel mergers and acquisitions specialist who served as the chief negotiator for Gearhart.

“I am tired but happy,” Brown said in a phone interview from his Los Angeles office.