Iacocca joins a bid that rocks Detroit’s hottest automaker
BATTLE FOR CHRYSLER
Iacocca joins a bid that rocks Detroit’s hottest automaker
Back in the late 1980s, before he was pushed out of his job as head of Chrysler Corp., Lee Iacocca had nothing but scorn for corporate raiders. Denouncing them as opportunists “propelled by a lust for dollars,” he complained that hostile takeovers were forcing America’s leading corporations to go deeply into debt rather than investing in research and new equipment. Last week, however, the veteran car executive abruptly changed gears by joining an audacious $32billion takeover bid for his former employer—which, if it succeeds, will saddle the world’s hottest automaker with a stunning $15 billion in new debt. If the 70-year-old Iacocca was at all embarrassed about his sudden U-turn, he did not show it. He declared: “I’m in this as an investor.”
Iacocca’s partner in the takeover bid for Chrysler is Kirk Kerkorian, a billionaire who is as much a legend among takeover artists as Iacocca is among the engineers and salesmen of Motor City. A shy, 77-year-old Las Vegasbased financier who has amassed a fortune in airlines, movie studios and casinos, Kerkorian already holds a $2.8-billion stake in Chrysler— a 10-per-cent share that makes him the company’s biggest shareholder. For months, though, Kerkorian has been feuding with the company’s senior managers, complaining that the stock was undervalued and that shareholders were being shortchanged. Most investors in that position might have opted to sell their stake, but Kerkorian decided to up the ante— forcing Chrysler on to the defensive and all but guaranteeing himself a substantial profit.
Kerkorian’s move clearly caught Chrysler
managers by surprise. The company’s chairman and chief executive, Robert Eaton, was only minutes away from giving a speech at a major auto show in New York City when aides took him aside and briefed him. A widely respected engineer whose team-oriented approach contrasts sharply with Iacocca’s more bombastic leadership style, Eaton promptly cancelled his address and flew back to Chrysler’s Detroit headquarters. After a hastily arranged board meeting, he fired off a statement that the automaker “is not for sale.” Added Eaton: “We don’t want to put Chrysler at risk.”
Representatives of Chrysler Canada’s 14,000 workers also panned the uninvited offer. Echoing Iacocca’s previous objections to corporate raiding, Canadian Auto Workers president Buzz Hargrove noted that Kerkorian’s plan would force the company to divert huge sums from research and development—
without creating a single job. Toronto-based auto analyst Dennis DesRosiers, meanwhile, said the looming takeover battle could scuttle plans to expand Canadian operations. Said DesRosiers: ‘The deal has serious implications for Canada that are quite negative.”
If Kerkorian does manage to capture Chrysler, it would rank as the second-largest corporate conquest of all time, after the $43billion buyout of RJR Nabisco in 1989. The bid itself is a throwback to the leveraged buyouts of the 1980s because neither Kerkorian nor Iacocca are putting much of their own money on the line. Instead, they propose to pay for the purchase by loading up the company with new debt and draining off $8 billion in cash reserves. Chrysler is awash in cash after three wildly successful years; profits were a record $5.2 billion in 1994, $3.4 billion in 1993 and $700 million in 1992. For his part, Eaton said that Chrysler needed to hold on to its money because “it needs to maintain adequate cash reserves to weather downturns in the business cycle, as well as to maintain its ability to develop new products.”
Up to now, a healthy chunk of that cash has been earmarked for Canada. DesRosiers said that Chrysler currently plans to spend more than $1 billion next year retooling one of its Windsor, Ont., assembly plants for a new line of full-sized vans. Another $500 million will be required over the next two years for improvements at the company’s Bramalea, Ont., assembly plant, which produces such midsized LH sedans as the Chrysler Intrepid and Concorde. All those plans, DesRosiers said, have been thrown in doubt by last week’s takeover bid: “In a debt-laden company, the first thing that goes is capital expenditures.”
In Windsor, Chrysler Canada executives declined to comment on Kerkorian’s bid. Said corporate spokesman Walt McCall: “Anything
that happens in the United States is going to directly affect us. We are a 100 per-centowned subsidiary and North America is seen as one market.” Chrysler Canada manufactured 695,000 cars, minivans and trucks last year—85 per cent of which were shipped to the United States.
Under Eaton’s leadership, North America’s third-largest automaker has been attempting to break out of the boom-and-bust cycle that characterized Iacocca’s 14-year reign at Chrysler. In both the early 1980s and 1990s, Chrysler skidded to the brink of bankruptcy. The company needed Canadian and U.S. government loan guarantees to survive in 1980. Now, Chrysler is considered among the bestrun automakers in the world. But its strategy of stockpiling cash for the inevitable rainy day has also made it vulnerable to a takeover.
What remains to be seen is whether Kerkorian is serious about wanting to control
Chrysler, or whether he is merely trying to increase the price of the stock. Last week, a spokesman for the raider said he would welcome another large investor in his bid. That led analysts to speculate about a possible partnership between Kerkorian and the likes of Volkswagen AG, Mercedes-Benz and Toyota Motor Corp.—each of which would like to expand its influence in North America at a time when the U.S. dollar makes such purchases attractive.
Outside the financial community, Kerkorian’s bid prompted widespread dismay. Jim Harbour, a prominent Troy, Mich.-based auto consultant, said that the offer clearly puts the financier’s interests ahead of Chrysler’s. “If you take cash out and add on a lot of debt, you
have structured Chrysler to go right back into the sewer in the next downturn. Do I think this bid is for real? No, I think it’s a joke.”
But Kirk Kerkorian cannot be laughed off. The California-born child of Armenian immigrant farmers is known for bold, imaginative deals. The former cargo pilot made a fortune building a charter airline, then made hefty profits buying and selling control of movie studios and some of the world’s largest hotels and casinos. True to form, he bought most of his stock in Chrysler in 1990 when the company was wracked with problems and shares were trading for about $16.
Thanks to the popularity of its minivans and stylish new cars, Chrysler has seen its share price rise to a peak of more than $80 in early 1994. However, in the past year investors have marked down the price of shares in all three U.S. automakers, expecting profits to drop as rising interest rates bite into car sales. Kerko nan has been sniping at Chrysler management since November, when he forced the board of directors to increase dividends for shareholders and amend its "poison-pill" takeover defence to make an offer for the com pany more likely. Still, Chrysler shares were trading early last week near 52-week lows of $55. The stock jumped $12.50 on reports of Kerko nan's bid, closing the week at $65.38.
The wild card in Kerkorian's bid is lacocca While the former chief exec utive's financial contribution is a rela tively puny $70 million in Chrysler shares, his influence is enormous. lacocca was the public face of Chrysler during his years in the executive suite, appearing in 61 tele vision ads for the company uttering slogans such as, "If you can find a better car, buy it." In a conference call with investment bankers last week, lacocca insisted that he is not trying to take back the reins of Chrysler management. But analysts doubt that he could stay away. "Lee lacocca would want to be in there,"
Harbour said. "He misses the Chrysler corpo rate jet." DesRosiers added that lacocca was "nudged out" by the board after Chrysler's 1990 brush with bankruptcy, effectively scut tling his plan to expand the company's over seas presence. Said DesRosiers: "Potentially, lacocca could go in and recreate his dream of a global car comDanv"
Chrysler's Eaton now has several options in fighting off Kerkorian and lacocca. He can sit tight, refusing to consider the takeover offer and hoping shareholders will do the same. Chrysler could also look for a friendly suitor, buy out Kerkorian's stake to make him go away or raise share prices by using some of its cash to buy its own shares. The one near certainty is that, when the takeover fight ends, Chrysler itself will look dramatically dif ferent than this year's conservative design.
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