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Did One Man’s Ego Kill a $38B Merger and His Company’s Stock Prices?

How the merger of two of the country's largest natural gas companies turned out to be ill-fated.

A team of contractors work on the Williams Transco gas liquids pipeline October 6, 2017 in Lebanon, Pennsylvania. (Photo by Robert Nickelsberg/Getty Images)

A failed merger of two major energy pipeline companies is playing out like a daytime soap opera in a Delaware courthouse, with secrets emails, questionable alliances and irresponsible power grabs all coming to light.

In 2016, The Williams Companies was to merge with Energy Transfer LP as part of a $38 billion deal to create the largest energy pipeline company in America. Documents Indicate the merger ground to a halt after Williams CEO Alan Armstrong sabotaged the agreement, allegedly because he did not want to lose power. Armstrong’s actions have left some independent observers wondering if he ever intended for the merger to occur.

Ultimately, the merger was abandoned once Energy Transfer’s financial team realized the structure of the merger would create a large tax liability due to a downturn in the oil and natural gas market. Since the merger was constructed to take place only if no new tax burdens were created, a Delaware Court of Chancery judge determined Energy Transfer was legally allowed to abandon the merger agreement.

Williams responded by taking Energy Transfer to the same Delaware court in hopes a judge forces Energy Transfer to pay a $410 million termination fee because the merger was not completed.

Energy Transfer claims it owes nothing, and has filed a counterclaim stating Williams CEO Alan Armstrong secretly worked to undermine the merger.

In a statement released to The American Conservative, a Williams spokesperson said the company expects a legal victory. “In its attempt to avoid the consequences of its own conduct, Energy Transfer has made a series of unfounded allegations and legal arguments,” the statement read. “We believe Williams is entitled to judgment in its favor and look forward to the final resolution of this dispute.”

The Market Institute, which last week released a 30-page report documenting the failed merger, places much of the blame for the botched deal on Armstrong.

“We’ve spent a significant amount of time looking at some of Armstrong’s actions as Williams CEO, and what we’ve found is a history of troubling behavior – including the failed merger, but also his lack of communication and need for power,” said Charles Sauer, an economic policy expert who serves as President of the Market Institute. “There appears to be a pattern of troubling activity, and previous board members have echoed this as well. That makes you wonder at what point will shareholders decide enough is enough?”

Even as the merger was moving forward, it became evident that Armstrong opposed the plan. He voted against the merger twice during a September 2015 board of directors meeting that officially authorized the merger.

According to the Market Institute’s report, Armstrong saw the merger “as a poor value proposition for his company’s shareholders and for himself.” Armstrong understood that if The Williams Companies merged with Energy Transfer, he would likely lose his CEO title – and possibly his job entirely. He responded to this threat by “working exclusively on finding ways to break the deal instead of ways to complete the deal,” according to a former board member.

One way Armstrong apparently worked to “break the deal” is outlined in legal records.

An Energy Transfer court document claims that Armstrong engaged in a secret public relations campaign to attack the merger and improperly feed information to an ally to use as the basis for a lawsuit filed to stymie the deal.

Armstrong allegedly emailed confidential company documents to John Bumgarner, a retired senior executive with The Williams Companies who was previously accused of insider trading.

In a series of emails later made public, Bumgarner asked Armstrong for assistance with outlining allegations that would form the basis of the lawsuit against Williams and Energy Transfer Equity, the company that would be created by the merger.

A legal brief submitted by Williams downplayed the relationship and the email correspondence between the two. The brief maintained that Armstrong’s “communications with Bumgarner were ‘mostly oral’ and that he did not recall email conversations.”

According to court documents, Armstrong deleted his personal Gmail account a day after a disposition in which he was asked about his email correspondence with Bumgarner, making the emails unavailable to be used as evidence. Armstrong testified that he went to the trouble of deleting his email account because, “that account started being heavily attacked with all kinds of spam.”

In his suit, Bumgarner argued the projected value of the combined company was overstated “in a deliberate attempt to deceive public investors.” The suit asked the court to halt the merger due to “material misrepresentations” that constituted a violation of federal securities laws.

The judge who heard the case found no evidence supporting Bumgarner’s assertions and dismissed the suit.

On June 30, 2016, the day after the merger officially fell apart, six of the 13 members of the Williams board of directors attempted to remove Armstrong as CEO due to his poor handling of the merger. Many of the board members seeking to oust Armstrong “had strongly favored the Energy Transfer deal even as Armstrong worked against it,” according to the Market Institute report. After the attempted overthrow failed, the six board members who failed to oust Armstrong resigned.

“There was discussion of the substantial business and operational failures that have occurred over the last five years on Alan’s watch as CEO,” hedge fund mogul Keith Meister said about the final meeting he attended before he resigned from the Williams board. “I did not hear a credible defense of Mr. Armstrong’s track record of business performance.”

In his resignation letter, Eric Mandelblatt, a former Goldman Sachs energy trader, wrote Armstrong was “incapable of maximizing shareholder value and, instead, is primarily focused on maintaining his role as CEO.”

“I cannot serve on a board that continues to empower a CEO with an abysmal operational and financial track record, and who, in my opinion, lacks the necessary judgment and character to lead the company forward,” Mandelblatt wrote.

Ralph Izzo, the chief executive officer of New Jersey’s Public Service Enterprise Group Inc., told Bloomberg that he “felt that was not in the shareholders’ interests [for Armstrong] to lead the company going forward.” Williams “had underperformed and needed a change in leadership.”

Armstrong may have weathered the board’s coup attempt, but there is little dispute that the failed merger proved costly to stockholders.

According to the terms of the merger, Energy Transfer planned to acquire Williams Companies shares at $43.50 a share.

Months later, when news surfaced of the merger’s collapse during time of falling energy prices, Williams shares bottomed out at $13.47. Shareholders lost tens of billions of dollars in value as a result of the failed merger.

“When you stop to realize how the stock price has suffered since the deal fell apart, it makes you wonder where investors would be today if the merger had gone through,” said A.J. Ferate, an Oklahoma-based attorney tracking the case.

Since the merger unraveled, the stock has fluctuated between $12 and $30 per share, never coming close to approaching the $43.50 price Energy Transfer was planning to pay.

Things may get even worse for Williams shareholders, warns David Andrews, the founder and CEO of Independent Investment Analytics an independent investment analysis firm.

”While Williams remains a strong investment opportunity, and valuations are good right now, I remained concerned that Armstrong’s ability to execute through the crisis and any upcoming difficulties could impact shareholder value,” Andrews said. “The challenging economic environment coming out of the COVID-19 crisis, combined with plummeting oil and gas prices, will require a stronger management team than Williams has in place.”

Sauer, who authored the Market Institute report dissecting the failed merger, echoed Andrews’ sentiments.

“Shareholders, now more than ever, must be able to trust that corporate leadership is acting in their best interest,” said Sauer. “That is not the case of Alan Armstrong and Williams Companies. If history is any indicator, potential investors should think twice before supporting this kind of poor corporate leadership.”

Drew Johnson is an investigative reporter and government watchdog expert. He is a member of Investigative Reporters and Editors and serves as a Senior Scholar at the National Center for Public Policy Research.

This article was supported by the Ewing Marion Kauffman Foundation. The contents of this publication are solely the responsibility of the authors.

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