Chrysler Chairman Lee A. Iacocca, one of the nation’s most outspoken critics of Wall Street’s obsession with mergers, acquisitions and junk bonds, now acknowledges that he considered mounting a management-led leveraged buyout of Chrysler earlier this year.
Iacocca said he and other top executives at Chrysler “kibitzed” about the possibility of taking Chrysler private through a leveraged buyout, but eventually rejected the idea for fear of burdening the auto maker with too much debt.
In the past, Iacocca has always lambasted the very idea of leveraged buyouts, arguing that they were endangering American competitiveness by burdening companies with too much debt.
“I believe that merger madness has gotten out of hand,” Iacocca wrote in his column, syndicated by the Los Angeles Times, in 1985. “Hostile takeovers, leveraged buyouts and junk bonds are hardly the kinds of things that propelled us to greatness.”
Yet in an interview published Monday with Automotive News, an industry trade journal, Iacocca suggested that while he has rejected the idea for now, “there is always a possibility” of a buyout in the future. “But it would have to be done in such a way that you didn’t burden the future of the company with a lot of debt. If you could do it with bank credit, not junk bonds,” it might succeed, he added.
Yet the very nature of a leveraged buyout requires the addition of massive amounts of debt to a company’s balance sheet. And automotive analysts warned Monday that a buyout at Chrysler, given the company’s declining financial health in the face of ever-fiercer Japanese competition, could prove disastrous for its long-term outlook.
“The fact of the matter is that cyclical companies are not real good risks for leveraged buyouts,” said Maryann Keller, automotive analyst with Furman, Selz, Mager, Dietz & Birney. “You make one wrong assumption on earnings and then you can’t cover your interest payments.
“And there is no more cyclical industry than autos.”
Given the number of leveraged buyouts that have soured in recent months as the economy has softened, Wall Street might not be in the mood for taking Chrysler private anyway, Keller added.
“You might have been able to do it three years ago, when the auto industry was riding high, and leveraged buyouts were riding high,” she added. “But you could never carry it off in the present climate.
“Competition in the auto industry is too fierce, and there have been enough buyouts that have gone bad to frighten people off.”
But the fact that Iacocca, the nation’s best-known advocate of the need for America to remain competitive in manufacturing, would consider leading a leveraged buyout indicates just how lucrative and tempting they can be. Iacocca’s management team would stand to make millions through such a deal.
Still, Iacocca defended the idea by arguing that “when management has a piece” of a company, it tends to operate the firm more efficiently.
Yet he also admitted that the interest costs would add a heavy burden that would be hard to overcome.
“But can I do it, can I get the hundreds of millions out (of the cost structure of the company) to offset what I’ve got to pay extra to all the junk bond artists? It may be a loser. So I don’t think it is that simple.”