Report: Williams CEO Scuttled a Merger Directors and Shareholders Wanted

COMMENTARY

As a four-year-old court battle over a breakup fee for an ill-fated merger between two energy pipeline companies continues, a new report by the Market Institute details a shocking campaign by Williams Companies CEO Alan Armstrong to scuttle the merger with Energy Transfer.

Destined to Fail: How Deception and Desperation Scuttled the Energy Transfer/Williams Merger is authored by Charles Sauer, founder and president of the Market Institute, a small business limited government advocacy non-profit think tank. The report chronicles how one of the largest deals in the pipeline sector to date unraveled over the course of 18 months spanning 2015 and 2016. Falling energy prices at the time provide a backdrop but not a complete explanation of what went wrong. 

The litigation saga that now centers on the break-up fee reveals a litany of objectionable actions by Armstrong in particular and raises serious questions about CEO accountability more broadly. 

The report cites numerous court filings, news stories, and public statements by those at the center of a high-stakes corporate showdown to document how Armstrong initially kept important information about Energy Transfer’s interest and terms from Williams board members. Once the Williams board decided to move ahead with the merger in September 2015, Armstrong secretly teamed up with Robert Bumgarner, a former colleague who also opposed the merger, on a lawsuit to block it, even though 80 percent of Williams shareholders approved the deal.

“In light of Armstrong’s repeated efforts to scuttle the deal, it seems a bit absurd that it is Williams that is insisting Energy Transfer must pay a break-up fee of about $1 billion,” Sauer said. 

The intrigue began in early 2014 when Kelcy Warren, founder and chairman of Energy Transfer, one of the largest oil and gas pipeline companies in the United States, reached out to Armstrong to raise the idea of combining forces. Over the next year, the idea sat on the back burner as Williams completed a merger of its own and began planning for a stock purchase of affiliate companies in which it had a stake. It was all part of an internal consolidation that Armstrong believed would put the company in a strong position in an uncertain energy market.

According to the report, when Warren pressed his interest in Williams anew in early 2015, Armstrong embarked on a strategy of incrementalism and sabotage: He did what was necessary to respond to Williams board members who were favorably inclined toward a merger with Energy Transfer but did little to make the deal happen. What’s more, he took steps to prevent it. For example, according to the Market Institute’s review, for weeks Armstrong kept to himself that the internal Williams consolidation was a deal killer for Energy Transfer. When Williams announced its internal restructuring in mid-May 2015, a frustrated Warren was forced to go public about Energy Transfer’s intention to move ahead with a takeover bid.

In September 2015, the Williams board narrowly agreed to Energy Transfer’s $37 billion offer. About a week later, Armstrong was transparent with his misgivings about a deal that would effectively end his stewardship of the company at which he had spent his career. Warren also acknowledged to Williams shareholders that it was a bitter pill, but the Williams board had made its decision.

“Just days after the Williams board agreed to the merger with Energy Transfer, Armstrong admitted to his employees he was not happy about the transaction but assured them he would abide by the board’s decision to make it happen,” Sauer said. “In fact, our review of the litigation battle indicates Armstrong was unhappy enough to try to make sure it did not happen. In retrospect, the deal seemed destined to degenerate into what the Dallas Morning News called ‘a Kardashian-style divorce.’”  

The Market Institute’s report describes how Armstrong, unsuccessful in blocking his board from accepting Energy Transfer’s offer, began a behind-the-scenes operation to nix its consummation. The report details how Armstrong coordinated closely with Bumgarner on a “public relations campaign” against the merger, which included providing unfavorable information about it to the Wall Street Journal. The two apparently exchanged “numerous emails,” often using Armstrong’s personal Gmail account (an account that Armstrong deleted just a day after his deposition in subsequent litigation). Armstrong offered the implausible explanation that he did so because the account was overwhelmed with spam. As such machinations were exposed, one of Williams’s board members said these communications were clearly wrong and Armstrong’s behavior was, “unbecoming an officer of a public corporation.”

Ironically, the lawsuits in which Armstrong’s maneuverings were described were initiated when both companies were still publicly declaring their intentions to finalize the merger. By the spring of 2016, the shale oil boom was heading toward bust. Energy Transfer offered special shares of stock to shield the company’s shareholders from possible losses. According to the Market Institute report, it was a transaction fully consistent with Warren’s obligation to Energy Transfer’s shareholders but Williams characterized it as an attempt by Energy Transfer to shortchange Williams shareholders and sued. Energy Transfer countersued, laying out some of Armstrong’s clandestine efforts to sabotage the deal.

On the eve of the deadline for sealing the deal in June 2016, Energy Transfer declared its internal and external tax and legal specialists could not certify that the transaction would be non-taxable, which was a condition in the merger agreement. That could have been a timely opportunity for both companies to call off a deal with a fading financial rationale but Williams filed suit yet again, claiming Energy Transfer concocted the tax issue simply to walk away from the deal and escape the breakup free. Their allegation did not hold up in court.

The Market Institute report is agnostic on the earnestness or validity of Armstrong’s misgivings about the financial and strategic downsides to the transaction, the technical elements of assessing the tax consequences of the deal, and calculation undergirding shareholder allegations of financial losses. However, it chronicles the breakdown in corporate governance and transparency that has proven costly to both companies.

When the deal collapsed, Armstrong narrowly survived a board vote to remove him. Board members who favored replacing him resigned and two of them issued statements highly critical of Armstrong. 

Former director Michael Mandelblatt’s letter filed with the SEC said 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.”

Board member Keith Meister likewise pulled no punches: “I can only conclude that those directors who were unwilling to support this change have acted more out of a personal loyalty to Alan Armstrong, rather than permitting the facts of his performance to take them to the correct answer,” he wrote.

Energy Transfer and Williams remain major players in an industry that had been reeling from low prices even before the coronavirus pandemic reduced demand for oil and gas to a trickle and their battle over the $1.5 billion breakup fee continues. Specifically, still in contention is whether Armstrong’s communications with Bumgarner put Williams in breach of contract, which would take Energy Transfer off the hook for any breakup fee.

“What we found highlights the importance of sound corporate governance and the obligation of executives to be accountable and transparent with corporate boards,” Sauer said. “Of course, as Warren Buffet once observed, ‘When seeking directors, CEOs don’t look for pit bulls. It’s the cocker spaniel that gets taken home.’”

Read the full report here.

Levi Lefebure is a freelance reporter based in Cedar Rapids, Iowa