Kerkorian-Chrysler Situation Could Be a Win-Win
In an echo of the 1980s, billionaire Kirk Kerkorian is threatening Chrysler with legal action unless it gives shareholders a higher dividend or buys back its own stock to boost the price.
Kerkorian, who owns 32 million shares--or 9%--of Chrysler stock, won support last week from some institutional investors who said the auto company should do more for stockholders now that it has strengthened its balance sheet and has roughly $7 billion in spare cash.
But these are the sober and stingy ‘90s, not the fast-money ‘80s, so there are no investment bankers hovering around Chrysler’s Highland Park, Mich., headquarters preparing for a hostile buyout battle.
Chrysler management hasn’t responded publicly to Kerkorian, who is a friend of the company’s retired chairman, Lee Iacocca. But the company’s current chairman, Robert Eaton, has always said he wanted to build cash, as much as $10 billion, as a bulwark against the next economic downturn--an understandable policy, since Chrysler almost went under in the 1991-’92 recession.
It’s a fascinating dispute, raising questions everybody wonders about: Do small shareholders really benefit along with the big boys in these affairs? Would paying out half its cash hoard to shareholders be the wisest course for Chrysler’s long-term future? And--a throwback to the ‘80s--what does all this stock market stuff have to do with creating jobs and strengthening a U.S. company for competition in world markets?
The market’s reaction thus far provides no clues. Chrysler stock rose and fell in recent days--ending the week at $49 a share--as much because of the Federal Reserve’s rise in interest rates as speculation about Kerkorian’s true intentions.
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But small shareholders in Chrysler could be sitting pretty no matter how management answers Kerkorian, because the outlook for sales of Chrysler’s cars, Jeeps and minivans is stronger for the next couple of years than its current stock price suggests. The company this year will earn more than $3 billion on more than $48 billion in sales, and it expects a banner 1995, despite rising interest rates.
Kerkorian only adds sugar to the mix. The company has raised its dividend 66% to $1 a share in the past year, but may boost it again with prodding from Kerkorian and other large shareholders. Or Chrysler could buy back stock, which tends to boost the price of the remaining outstanding shares.
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That, however, might cost $2 billion to $4 billion. And although the company can afford it as long as the good years continue--annual cash flow (income plus depreciation) now approaches $5 billion--it does face some heavy expenditures.
“Chrysler has to revitalize its manufacturing plants,” says David Cole, head of the Office for the Study of Automotive Transportation at the University of Michigan.
The company has achieved great efficiency, Cole acknowledges, “but machinery gets old and needs to be renewed. And that takes money.” Indeed, aging manufacturing systems could explain one of Chrysler’s continuing problems: Its vehicles, though stylish and popular, score low on quality, according to J.D. Power & Associates, the research firm.
In addition, extra money could help Chrysler make a bid for a presence in China and India, the two massive auto markets that have world business transfixed.
It may seem odd to talk of a cash-rich Chrysler. This is the company that was saved by U.S. taxpayers in 1981 and by fresh capital from private investors, including Kerkorian, in 1990 and 1991. But Chrysler has come back to prosperity through fierce cost discipline, flamboyant styling and a historic change in the U.S. car business.
Auto manufacturers used to expand plants as sales rose, only to suffer losses as demand subsided; the business was all up and down cycles. Now, Chrysler refrains from adding new plants but shifts around production of its specialty vehicles to meet changing tastes.
And it can’t meet demand for its sport utility vehicles--glorified Jeeps such as the Grand Cherokee models, which sell for as much as $30,000 apiece.
Further, Chrysler is the most efficient car producer in the United States--second in the world only to Toyota, says Doug Kevorkian, an independent auto analyst in Ann Arbor, Mich. One reason is that the company gets 70% of its parts from outside suppliers, with which it works closely. That creates jobs at auto suppliers. And efficiency and growth create jobs at Chrysler, which has expanded employment 28% to 128,000 since 1991.
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Still, shareholders are restless. There is muttering among big holders about Chrysler’s top officers--Eaton, President Robert Lutz, engineering boss Francois Castaing and others--turning a good profit selling optioned stock last December and January, before the stock market broke and Chrysler stock fell 20% to current levels.
“Some investors are simply whiners,” snorts Tony Kreisel, manager of Putnam Growth and Income Fund, which invests in Chrysler. Kreisel’s point and that of others is that Eaton, Lutz and the other managers pushed creation of the stylish vehicles that brought Chrysler success and took its stock from $11 a share in early 1992 to $63 in early ’94. “This is an entrepreneurial car company; why shouldn’t they benefit?” he asks.
On the other hand, Kerkorian, 76, a legendary trader who has just rebuilt Las Vegas’ MGM Grand, is no ‘80s-style raider. He invested in Chrysler in 1990 at the behest of Iaccoca, who saw the company heading into terrible times. “His investment helped save the company,” says one analyst. “If he wants to ask for a higher payout, he’s got a right.”
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The upshot: Chrysler’s management will do something to accommodate Kerkorian and other large investors among its 202,500 shareholders. But because this is the ‘90s, it won’t have to boost payouts foolishly as companies had to do in buyout battles of the ‘80s. Resources can be used to expand the business, for the benefit of employees and customers and Chrysler’s 92,000 retirees.
How are the ‘90s different? We’ve learned a lot. We see how investors and markets are connected to assembly lines and paychecks--and that success results from combined effort.
