Kerkorian, Iacocca Offer $20.8 Billion to Buy Chrysler : Business: No. 3 auto maker, citing financial risk, says company is not for sale. Surprise, hostile move by investor group rattles Detroit, Wall Street and foreign capitals.
Kirk Kerkorian, one of the world’s richest men, Wednesday teamed up with former Chrysler Corp. Chairman Lee A. Iacocca to make a $20.8-billion takeover bid for Chrysler--a stunning offer that would be the nation’s second most expensive corporate purchase ever.
But the nation’s No. 3 auto maker rejected the offer, saying it could put the company at financial risk. “The company is not for sale,” Chrysler said in a strongly worded statement released late Wednesday after its board of directors met.
Kerkorian, who is backed by Iacocca and several unnamed investors, offered $55 a share for the auto maker’s outstanding shares. The offer sent tremors through Detroit, Wall Street and international capitals.
It sparked widespread speculation that Kerkorian may be more interested in driving up the value of his 10% stake in Chrysler than in gaining control of the company. The offer could also prompt other bidders to emerge willing to pay more, putting the company “in play.”
The unexpected offer also raised the specter that a long-awaited consolidation of the world’s auto industry may be under way. In New York, the move prompted comparisons to the heady merger mania days of the 1980s.
The takeover fight marks another chapter in the storied history of Chrysler, which was formed in 1925 and made Dodge, Plymouth and DeSoto household names. After two brushes with bankruptcy in the ‘70s and ‘80s, the company has emerged today as a new symbol of America’s industrial comeback.
News of the hostile bid became public just before Chrysler Chairman Robert Eaton was scheduled to give a speech at the New York Auto Show. He promptly canceled the appearance and flew back to Detroit, where he met with directors and advisers throughout the day.
If the bid succeeds, it would rank behind only the $25-billion sale of RJR Nabisco to Kohlberg Kravis Roberts six years ago.
The proposal sent Chrysler’s shares soaring. It closed at $48.75, up $9.50 in very heavy trading on the New York Stock Exchange, after hitting a high of $52.50. The stock peaked at $63.50 last year, its all-time high. Chrysler initially reacted cautiously to the proposal. The company said in a statement that the bid was unsolicited and noted that Kerkorian has not arranged financing. However, Chrysler said its board of directors, and legal and financial advisers would evaluate the proposal.
But after the board meeting, the company said the offer amounted to a leveraged buyout that would leave the auto maker with more debt and less cash to weather the next economic slump and develop new vehicles.
“We don’t want to put the company at risk,” Eaton said.
While there was some skepticism of the seriousness of the takeover proposal, analysts said Kerkorian was capable of raising the money. They also said there is a strong possibility of higher competing bidders, including foreign auto makers.
“It’s going to be hard for Chrysler to put the genie back in the bottle,” said David Healy, an Arizona-based auto analyst. “Chrysler has been put into play.”
David Cole, executive director of the University of Michigan’s Office for the Study of Automotive Transportation, said even though Chrysler has rejected Kerkorian’s offer, other higher bids are likely to arise.
“Let the games begin,” he said. “This will be an Olympic-sized business contest.”
Kerkorian, whose fortune is estimated to be more than $2.5 billion, is proposing to make Chrysler a private company. He would bring it under the wing of his Tracinda Corp., a Las Vegas company that Kerkorian controls and that owns MGM Grand Hotel, Casino and Theme Park.
The reclusive, 77-year-old Kerkorian owns about 10% of Chrysler’s stock, making him the company’s largest stockholder. He began acquiring shares in 1990 when Chrysler was facing a financial crisis and its stock was trading at about $12 a share. The value of his holdings jumped nearly $350 million on Wednesday alone.
While becoming a major investor, Kerkorian also befriended Iacocca, the charismatic salesman who directed Chrysler’s rescue from near financial ruin in the 1970s and ‘80s with federal money and put in place the strategic plan that resulted in Chrysler’s recent turnaround. The company earned $3.7 billion in 1994.
Iacocca, 70, retired in 1993 but remains a Chrysler stockholder. In a statement, he said he has “no interest in actively participating in management.”
Alex Yemenidjian, a top executive and spokesman for Tracinda, said that the takeover would be undertaken by putting up $5 billion in investor equity, using another $5.5 billion in excess cash that Chrysler has built up, and obtaining financing for the remaining $12.3 billion, including the company’s existing debt.
The equity includes about $2 billion in stock now held by Kerkorian and $50 million owned by Iacocca. Yemenidjian declined to identify other investors who will provide money for the proposed transaction.
Tracinda has not arranged financing, but retained investment adviser Bear Stearns & Co. Wednesday to begin the process. “We believe the transaction is very readily financeable,” Yemenidjian said in a press conference in Las Vegas.
Yemenidjian said the proposal was not a leveraged buyout, meaning that it would not pledge its assets to pay down debt, and would leave Chrysler with a strong balance sheet. He said Chrysler would have a lower debt-to-capital ratio, a common measure of financial strength, than General Motors Corp. or Ford Motor Co. after the takeover.
“This is not an RJR Nabisco. This is not a Time-Warner,” he said referring to hostile takeovers in the late 1980s that left the companies strapped with debt.
He also said that Kerkorian, who was not available for comment, intended to keep the present management in place and did not anticipate any layoffs of workers as a result of the acquisition.
The takeover bid was prompted by frustration with Chrysler’s stock price, which has slumped in the last year despite the company’s strong financial performance.
In November, Kerkorian threatened to launch a hostile takeover of Chrysler unless the company took steps to enhance shareholder value. At the time, Kerkorian was seeking government approval to increase his ownership stake to 15%.
The company responded in December by announcing a 60% increase of its dividend and $1-billion stock buyback. Chrysler, however, decided against a stock split and elimination of its so-called poison pill provision that discourages hostile takeovers.
The poison pill takes effect if any investor buys more than 15% of the company’s stock. The holdings of the acquirer are diluted when additional shares are issued to other shareholders in the event the threshold is crossed.
Yemenidjian said that Chrysler would have to repeal the poison pill for Tracinda’s tender offer to proceed. He also encouraged the board to exercise its fiduciary duty to enhance shareholder value.
While he said the company’s purpose was not to put Chrysler in play, he said that Kerkorian would encourage the board to consider any higher offers that are made. He said Kerkorian would have to evaluate whether a higher bid was warranted.
“Kerkorian is playing poker with Chrysler and he has a pretty strong hand,” said Nicholas Loboccaro, analyst for S. G. Warburg, a New York brokerage house.
He and other stock analysts said that Chrysler was worth more than $55 a share and, depending on the board’s reaction, higher bids could emerge. Loboccaro said that a price or $75 a share is possible, while Scott Merlis of Morgan Stanley estimated $80.
Yemenidjian said that Kerkorian also will consider strategic alliances and partnership with foreign companies, a statement that fueled speculation that a foreign auto maker could emerge as a bidder. He said they would look for partners who not only have cash but would provide Chrysler with product and market diversification.
“We have a short list,” Yemenidjian said, although he declined to reveal who was on it.
Industry experts said that there is a variety of European and Japanese auto makers who could emerge as Chrysler partners. The strength of the German mark and Japanese yen against the U.S. dollar could make such an acquisition cheap and attractive.
In Europe, Fiat, Peugeot, Renault and Volkswagen might be interested. In Japan, Mitsubishi, Honda and Toyota could emerge as partners. Even some South Korean auto makers, such as Samsung, could be potential partners.
“You can bet there are transcontinental calls going on among auto makers trying to figure out how they can make something work,” Cole said.
Some analysts speculate that Fiat and VW are likely on Kerkorian’s list because Iacocca tried to negotiate a strategic partnership with both in the late 1980s. Both deals fell through, however.
The company also bought American Motors Corp. from Renault, a move that provided it with the Jeeps that have become one of its most popular products. It also has close ties to Mitsubishi in joint ventures.
However, Eaton, Chrysler’s chairman and chief executive, has publicly stated his opposition to alliances and joint ventures with other auto makers. He argues that they are too complex and take too long to develop.
Any acquisition by a foreign auto maker could prompt the scrutiny of federal regulators. Both the Justice Department and the Federal Trade Commission have the power to undertake anti-trust investigations of acquisition of major industrial firms by competitors and foreign concerns. Neither agency would comment Wednesday on the Chrysler situation.
The possible takeover of Chrysler comes as the auto industry is becoming more global. The major auto makers are trying to expand operations beyond the developed markets of the United States, Europe and Japan into emerging countries where the growth potential is greater.
Because of Chrysler’s financial problems in the 1980s, the company sold off much of its foreign operations. Some analysts argue that while it is the most efficient U.S. auto maker, it remains vulnerable to a downturn in the U.S. market.
