Wall Street is mystified and Detroit is terrified by Kirk Kerkorian’s investment in Chrysler. Neither the stock traders nor the auto workers know what the Los Angeles financier is after with his $272-million purchase of 9.8% of the car company’s stock.
Is he a true long-term investor, confident of Chrysler’s future, or does he see an opportunity to profit from deals involving the assets of the now-struggling car maker?
The verdict could go either way: Kerkorian could be hero or villain. But if he proves to be a corporate villain, as his past performance argues, maybe the American public should have something to say about it--if the 1990s are not to be a dreary continuation of the speculative 1980s.
It would be helpful to Chrysler, and indeed U.S. industry in general, if Kerkorian were an investor in the pattern of, say, Warren Buffett, the Omaha sage who takes a sizable stake in companies and waits for value to grow. Buffet has become a billionaire investing that way.
And such an approach could work with Chrysler. The No. 3 U.S. auto maker, with $35 billion in revenue and sales of more than 2 million cars and trucks a year, is an attractive long-term proposition. “Chrysler has some very intriguing products coming out, starting with a new Jeep next year and a whole series of new models in 1992,” says analyst Joseph Phillippi of Lehman Bros. investment firm.
Moreover, Chrysler is not necessarily in critical trouble in the short term, although it faces a grim year ahead along with every other U.S. car maker. It has money to weather the storm, with $4 billion in cash. In fact, Chrysler today has $17.70 per share in cash, even as its stock sells at $13.50 a share. Chrysler could pay off.
But Kerkorian might be a problem, strange as that may sound for a man who invests $272 million in cash.
Patient, long-term investment has not been the pattern for the 73-year-old Kerkorian, an entrepreneurial pilot who made his first fortune with charter airlines. Instead, he has made billions as a gambler and trader, and most recently as a scavenger--an investor in a weakened company who profits by feeding off the carcass.
For 20 years, Kerkorian was involved as owner in whole or in part of MGM studios, and he demolished the company through repeated deals and asset sales and constant changes of management. Yet as the property withered, Kerkorian prospered--ending up with billions from sales of such properties as the MGM film library.
“What he did at MGM was a tragedy,” says a Hollywood investment manager. “The irony is that if he had run it correctly, he’d have even more wealth as owner of a prosperous MGM which could still own its film library.”
Still, there’s money in scavenging; Kerkorian reaped a cool $927 million cash in last month’s final sale of MGM to Italian financier Giancarlo Paretti’s Pathe Communications.
And now Kerkorian has put $272 million into Chrysler--raising fears that he plans to play scavenger or perhaps to inspire a foreign buyer for the auto maker.
The danger is that Chrysler, to offset a buyout threat, would have to take special action to enhance immediate shareholder value. Already, one shareholder is suing Chrysler for having bolstered its anti-takeover defense in response to Kerkorian’s purchase. If Chrysler has to pay a special dividend or buy back stock, it could easily lose its investment grade credit rating, which is necessary for its finance subsidiary to be able to offer commercial paper, or low-interest corporate IOUs.
Chrysler Finance already has difficulty selling commercial paper and must finance with three-year bank loans at higher rates.
But if the investment rating falls, Chrysler might be forced in desperation to seek a buyer for its assets, including its still-valuable U.S. dealer and distribution system.
Earlier this year Chrysler had talks with Fiat of Italy about a cooperative venture. But they came to nothing. The more Fiat’s ruling Agnelli family looked at Chrysler, the less it liked--such as unfunded pension liabilities of $4 billion.
So what’s the real story on Kerkorian, whose investment bankers say he is inspired by his respect for Chrysler managers and their plans for the company?
The simple answer is: Watch what he does, not what he says. If Kerkorian’s intentions are genuinely long term, let him say so more emphatically--as Buffett did in one instance by putting his shares in a voting trust.
But if Kerkorian angles to buy more stock and puts pressure on the company, then his actions will speak for him.
Chrysler and its 121,000 employees--saved by the U.S. taxpayers only 10 years ago--could be on their way to the block.
The truth is, it would be an outrage if the jobs and lives of working in people in Detroit would continue to be disrupted by the machinations of financiers in Beverly Hills. Chrysler’s foreign competitors don’t have to put up with such nonsense.
Perhaps people should speak up in outrage, to Congress and state governments. Financiers and investment bankers made a lot of trouble for working people in the 1980s; turnabout in the 1990s would be simple justice.