Incorporated: 1953 as Zapata Petroleum Inc.
Sales: $117.5 million (1997)
Stock Exchanges: New York
Ticker Symbol: ZAP
SICs: 4899 Communications Services, Not Elsewhere Classified; 2077 Animal and Marine Fats and Oils; 6719 Holding Companies, Not Elsewhere Classified
Slated to become one of the ten largest Internet companies in the world, Zapata Corporation is involved in Internet and electronic-commerce businesses, operating an Internet portal and two on-line magazines, Word and Charged. Formerly an international oil and gas conglomerate, Zapata suffered profound financial losses during the 1980s, which eventually led the company away from energy-related businesses and toward its new identity, adopted in April 1998, as an Internet-related business. Zapata also maintained a 59.7 percent stake in a former wholly owned subsidiary named Omega Protein Corporation, which caught and processed fish for use as livestock feed.
1980s Spark Change
Zapata got its start in 1953 as an independent oil and gas venture launched by future President of the United States, George Bush. Bush, in his years before entering the national political spotlight, formed the company with the help of another distinguished individual, Pennzoil chairman J. Hugh Liedtke. Together, the pair set in motion a corporate entity that matured into a sprawling force in international energy-processing, with corporate reaches into a spectrum of diversified businesses, including natural-gas compression, off-shore drilling, and coal mining. At its peak as a global conglomerate, Zapata collected as much as $350 million in annual sales, exerting itself as a formidable force in its various industries. However, the most intriguing chapter in the company’s history began when its encouraging success started to unravel at an alarming speed, long after both Bush (who cashed in his stake in 1966) and Liedtke had left Zapata to pursue other interests. In the wake of the company’s sanguine years, debt accrued to a deleterious magnitude, touching off a two-decade period that saw the company scramble to forestall bankruptcy while it grappled with shaping a new identity for itself over and over again. The search to find a solution to its profound problems steered Zapata far away from its original business, into a field Bush and Liedtke could never had imagined.
Zapata’s troubles began in the early 1980s, when long-time leader R.C. Lassiter headed the company. At that time, company executives foresaw an imminent drop in oil prices, the beginning of what proved to be a disastrous decade for the U.S. petroleum industry. In an effort to increase Zapata’s market share before oil prices fell, company management directed the construction of 12 offshore drilling rigs, launching one last big push to dominate rival firms before the expected price plunge. The addition of the 12 new rigs did not deliver its intended effect, however. Instead, the imprudent construction of a dozen offshore drilling rigs delivered a blow to Zapata, saddling the company with enormous debt. When the fortunes of oil exploration took a downward turn, Zapata was left exposed to the fiercest effects of the industry-wide slump, unable to maneuver itself in a proper direction under the weight of more than $600 million of debt. In early 1985, Zapata reported a profit for its first quarter of business, but for years afterward the company reported financial losses, all largely because of the misguided decision to expand before the petroleum market contracted. As a Zapata spokesperson later noted in reference to the early 1980s expansion, “Those rigs turned out to be a turkey.”
While the remainder of the 1980s would be bleak years for Zapata, there was one positive aspect of the company’s business during the decade that would provide a glimmer of hope for the future: fishing. With a 57-vessel fleet at its disposal, Zapata caught fish—primarily menhaden—in the Gulf of Mexico and Chesapeake Bay. Menhaden, fish used as a source of fish oil, fertilizer, and bait, were processed and converted into livestock feed, from which the company realized a sizeable profit. To supplement its oil and gas exploration business and its commercial fishing operations, Zapata was also engaged in providing offshore services through Zapata Gulf Marine Corp. Started by Zapata, Houston Natural Gas Corp., and Halliburton Co., Zapata Gulf Marine, 34.7 percent owned by Zapata, made its debut in 1984, roughly a year before the oil drilling losses manifested themselves on Zapata’s balance sheet. The subsidiary company, along with the marine protein operations in the Gulf of Mexico and Chesapeake Bay, stood as two potential saviors for Zapata during the latter half of the 1980s, although neither performed well enough to compensate for the deep losses stemming from oil drilling.
As the mid-1980s began, the race to stave off bankruptcy began as well, with Zapata’s financial health becoming increasingly grave with each passing year. The company lost money in 1985, 1986, and again in 1987, when losses totaled $156 million on $146 million in revenues. A $600 million debt restructuring saved Zapata from bankruptcy in 1987, giving the company temporary relief, but, for the company to look forward to long-term financial health, Chairman Lassiter and his executive management team needed to find solutions that addressed the fundamental problems the enterprise faced. Lassiter began slashing costs wherever he could, and he began shedding assets that were dragging the company deeper into debt.
Through his efforts, overhead was reduced by 50 percent and more than $200 million worth of oil and gas properties were removed from Zapata’s portfolio. These measures, undertaken to create a more efficient and, with hope, profitable company, were enacted roughly at the same time Lassiter’s team engineered two shrewdly timed acquisitions. The company acquired two financial services companies and then resold them, netting a quick $65 million profit. This maneuver, coupled with $10 million of cash flow—the one encouraging figure amid a host of plunging financial totals—and the steps taken during the company’s restructuring, fanned a modicum of optimism at corporate headquarters, a positive perspective that some industry observers were quick to embrace. Forbes magazine, in particular, began pronouncing the potential recovery of the destitute Zapata, citing its encouraging cash flow, the significant reduction of overhead, and Zapata’s flourishing commercial fishing business as the ingredients for a successful turnaround. As would be the case during this difficult period in Zapata’s existence, however, hopeful expectations frequently were dashed.
Those who hoped for a more positive end to the 1980s for Zapata generally embraced the theory that the company’s robust fishing operations and its leaner oil service division would allow it to cover interest payments on its debt and then realize annual gains of 25 percent for 1989 and 1990. They were wrong. Zapata’s fishing operations did record great gains, more than doubling operating income in 1988, but the increase was not enough, falling short of pundits’ projections. A drought had increased the Gulf of Mexico’s saline content, which consequently depressed Zapata’s fish catch from an expected 950,000 tons down to 725,000 tons. Moreover, the adverse weather hurt the company in the one area it could ill-afford to suffer any damage. Commercial fishing had become increasingly important to Zapata, accounting for 47 percent of the company’s revenues when drought and high levels of saline conspired to reduce the year’s fish harvest. This unforeseeable problem, combined with a still-suffering offshore drilling business and a struggling oil service business, crippled the company.
The company’s precarious financial position entering the 1990s led to another corporate-wide, comprehensive restructuring, the failure of which, company officials admitted, would likely lead to Zapata seeking protection under federal bankruptcy laws. Zapata teetered on the brink of insolvency, having not declared a profit since the first fiscal quarter of 1985 and having just come off a $42 million loss for the nine months ending June 1990. As the essential restructuring progressed, the company announced in September 1990 that it had signed a definitive agreement to sell its offshore drilling rig fleet for $298 million. The properties were sold to a European investment group in an agreement that stipulated Zapata would continue to oversee the 12 rigs under a management contract. Meanwhile, company officials announced their plan to concentrate on the growth of Zapata’s three remaining businesses—offshore services, commercial fishing, and natural gas—until conditions improved for more sweeping, fundamental changes.
By the end of 1991, Zapata officials could at last glance at the company’s balance sheet without wincing. After registering a $105 million loss in 1990, the company ended 1991 by posting a $2 million profit. Company executives used the momentum built up to push ahead in 1992, when Zapata found itself in a position to make an acquisition. The company’s management contract for the 12 rigs it had built in the early 1980s expired in October 1992, creating a void that was filled the following month when Zapata re-entered the oil business through the acquisition of the Cimmaron Gas Cos. A Tulsa, Oklahoma-based private holding company, Cimmaron owned a variety of natural gas compression, processing, and marketing companies that, combined, generated annual revenues of approximately $180 million. Shortly after the completion of the acquisition, Zapata announced its plans to make further acquisitions and use Cimmaron as the foundation for a deeper presence in the gas-gathering and service industries. Highly fragmented, these two industries were beginning to consolidate, the prospect of which encouraged Zapata executives to make additional acquisitions.
Infighting in the 1990s
The calm that was beginning to settle by the end of 1992 was next interrupted by a shareholder power struggle. At the heart of the power struggle was Florida financier Malcolm I. Glazer, who, among various other business holdings, owned the National Football League’s Tampa Bay Buccaneers, for which he paid a record-setting $192 million. Glazer owned roughly 33 percent of Zapata’s stock, acquiring the shares in 1990 when Zapata was desperately fighting to avoid bankruptcy, and threatened a proxy fight in mid-1993 to install himself and his two sons to the company’s board of directors. With this fight looming by the end of June, Zapata hired a New York-based firm specializing in fighting takeover attempts to assist in its bid to re-elect Lassiter and two other candidates. The struggle ended peacefully after Lassiter and Glazer reached an agreement that resulted in the re-election of Lassiter and the appointment of Glazer and one of his sons, Avram Glazer, to Zapata’s board of directors.
At the time of the internal tumult, Zapata was continuing to pursue its new business strategy of increasing its presence in the natural gas processing and marketing segments of the energy industry. However, with Glazer occupying a position of power from mid-1993 forward, the company’s strategic objectives would change. Glazer’s control over Zapata increased significantly when Lassiter retired in July 1994, vacating positions that Glazer took over when he was elected the company’s chairman, president, and chief executive officer. Now fully in command, Glazer began taking actions that promised to change the face of Zapata entirely, as he sought to create a company more in tune with his talents and his business empire, which included real estate, television, health care, and food service companies.
After a plan to sell the company’s commercial fishing operations was cancelled in April 1995, Glazer completed the sale of Zapata’s gas compression business, operated by a subsidiary named Energy Industries Inc., to Enterra Corp. for $130 million. Glazer also sold the company’s five remaining oil and gas leases and a 31-mile natural gas gathering pipeline, further stripping Zapata of its former mainstay business lines. Next to go was Cimmaron, the natural gas compression, processing, and marketing company acquired in 1992, which was sold in April 1996 for $24 million, leaving a 25 percent stake in Bolivian natural gas properties as the only energy concern owned by Zapata. Soon, the Bolivian properties would be sold as well, as Glazer moved forward with his plan to create a new kind of Zapata for the 1990s.
A New Zapata Takes Shape for the Late 1990s
Glazer did not reveal his plans for what type of business Zapata would enter until a merger was announced in early 1996 that would wed Houlihan’s Restaurant Group, operator of a chain of nearly 100 casual-theme restaurants, and Zapata. Two Zapata shareholders immediately protested the proposed acquisition, arguing that the deal unfairly benefited Glazer, who owned 35 percent of Zapata and 73 percent of Houlihan’s. In response to the suit filed by the two shareholders, the Delaware Court of Chancery ruled that 80 percent of Zapata’s shareholders—a “supermajority”—were required to approve the merger before it could be completed, a ruling that prompted Glazer to terminate the deal in October 1996. His plan thwarted, Glazer made his next major move eight months later when he achieved his goal of ridding Zapata of all its energy-related assets.
In July 1997, Glazer sold all of Zapata’s Bolivian and oil and gas properties to Tesoro Bolivia Petroleum Company, thereby eliminating all links to the company’s past. Next, in November, Glazer bolstered the company’s commercial fishing operations by acquiring American Protein, Inc., which operated ten steamers and a menhaden processing plant in the Chesapeake Bay area, and Gulf Protein, Inc., owner of six steamers, five spotter planes, and processing equipment near Morgan City, Louisiana. Although at first it appeared Glazer might be shaping Zapata into a mighty commercial fishing operator, this was not the case. In April 1998 the company’s fishing business, controlled through a wholly owned subsidiary named Omega Protein Corporation, was spun-off in an initial public offering of stock (IPO), with Zapata controlling 59.7 percent of the newly independent company’s shares. Having distanced himself from Zapata’s last remaining business, Glazer was ready to make his most important decision. His next move would determine the future course for Zapata.
Two weeks after completing Omega Protein’s IPO, Glazer announced what type of business Zapata would enter. From April 27, 1998 forward, Zapata would compete in Internet and e-mail commerce business, its objective to acquire and consolidate companies involved with Internet and e-mail related ventures. Concurrent with the announcement, Zapata completed its first acquisition in its new industry, purchasing ICON CMT Corp., the owner of Word and Charged, two on-line World Wide Web magazines. In July 1998, Zapata increased its presence in its new business field by signing letters of intent to acquire or invest in 21 Internet sites and electronic-commerce businesses. Once the transactions were finalized, the company planned to integrate them into an Internet site located at www.zap.com, which was launched on July 6, 1998. Looking forward from this juncture in the company’s history, Zapata’s future course appeared clear as Glazer’s son Avram, who served as president and chief executive officer, led the charge into Internet-related business. Zapata’s goal, Avram Glazer explained, “is to become one of the largest Internet companies in world. We have the resources,” he continued, “to make [the company’s] strategy a reality and to lead the upcoming consolidation of this industry.” With this ambitious objective, Zapata prepared for the 21st century, facing a future that would be entirely unlike its past.
Zap, Inc.; Omega Protein Corporation (59.7%).
Culbertson, Katharine, “Zapata Managers Plan to Leave Energy Behind with Sale of Gas Assets,” The Oil Daily, April 10, 1995, p. 1.
Dittrick, Paula, “Zapata Gives Glazer, Son Seat on Board in Peaceful Finale to Threatened Proxy Battle,” The Oil Daily, July 6, 1993, p. 2.
Papiernik, Richard L., “Houlihan’s 2Q Profits Off as Zapata Takeover Looms,” Nation’s Restaurant News, August 26, 1996, p. 12.
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Schifrin, Matthew, “No Fish Story,” Forbes, September 19, 1988, p. 218.
“Shareholders Try to Stop Houlihan’s Zapata Merger,” Nation’s Restaurant News, May 20, 1996, p. 4.
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“Zapata Nears Exit from Energy Industry with Sale of Gas Compression Firm to Enterra,” The Oil Daily, September 22, 1995, p. 3.
“Zapata Sells Cimmaron Gas,” The Oil Daily, April 4, 1996, p. 5.
—Jeffrey L. Covell