BID FOR A GIANT AUTO MAKER : Driving Mr. Kerkorian : Buying Chrysler Might Be Last Thing He Wants
Is winning Chrysler the worst-case scenario for Kirk Kerkorian?
That’s what many in the automobile and investment businesses are wondering as they scrutinize the terms of the $55-a-share offer from the media-shy Las Vegas billionaire, as well as the significance of former Chrysler Chairman Lee Iacocca’s participation. Iacocca has pledged his $50-million worth of Chrysler stock to the Kerkorian offer.
Although many analysts believe the offer to buy Chrysler represents a bargain price, its prospects remain unclear.
One obstacle to the $22.8-billion deal is the company’s own “poison pill,” a corporate provision that would trigger a massive half-price sale of Chrysler stock to existing shareholders--and thus multiply the expense of a takeover attempt--if any one buyer obtains more than 15% of the company’s shares. Kerkorian now owns slightly more than 10%.
“The poison pill gives Chrysler a very strong defense against a hostile takeover,” said David B. Healy, automotive analyst for S.G. Warburg & Co.
Thus Kerkorian may have to raise his price to win the Chrysler board’s approval.
Still, many say Kerkorian faces little risk in throwing Chrysler open to bid.
“If he can entice a higher offer, he wins,” said Chet Needleman, chief executive of Newport Beach-based Palley-Needleman Asset Management, which owns about 2 million Chrysler shares. “If Chrysler is willing to buy back his stock, he wins. If he can’t go forward, he loses a lot of credibility, but you’re talking about one of the richest men in the country.”
That still leaves the chance that Kerkorian might actually succeed in buying Chrysler. Ownership and management of a heavy manufacturing entity is not characteristic of Kerkorian’s long investment history.
To find an example of a company that Kerkorian had to manage as a going concern, rather than as a collection of assets to be freely bought and sold, one must go back to the beginning of his career, when he bought a tiny one-plane charter airline in 1947, selling it nearly 20 years later for $104 million.
“This is clearly a departure for him,” said an investment executive who has known Kerkorian for years. But the same executive notes that his very purchase of Chrysler stock, which began in 1990 with 22 million shares for $272 million, was a departure.
“He used to invest in things he could own and control,” said the executive, who asked not to be identified. Noting that Kerkorian also bought 5% of Viacom’s stock last year as a passive investment, he added, “I guess he’s expanding his repertoire.”
More typical, observers say, is his 20-year ownership of MGM/UA, the Hollywood studio he bought into in 1969. By the time he was finished trading pieces of the rich MGM/UA legacy to such buyers as Ted Turner and Italian financier Giancarlo Parretti for a profit estimated at more than $1 billion, the studio was a gutted shell, devoid of income-producing assets.
“MGM/UA was not better off for having met Mr. Kerkorian,” said Needleman. “But Mr. Kerkorian was much better off for having met MGM/UA.”
Some investors fear Kerkorian may have something similar in mind for Chrysler. Spokesmen for Kerkorian’s Tracinda Corp. say the deal would be financed partly by using more than $5 billion of a $7.5-billion cash hoard that Chrysler management has built up against the next cyclical downturn in the auto industry--a moment that may already be upon them.
Kerkorian has said that Chrysler’s $7.5-billion cushion is excessive, but that is not a universally shared view.
“The worst-case scenario for Kerkorian is that he wins and has to manage an automobile company that he has stripped of the resources to survive a down cycle,” says John Schnapp, vice president and auto analyst at Mercer Management Consultants in Lexington, Mass.
“You’ve got to have the cash to ride it through, or your balance sheet heads in the direction that brought Chrysler to the brink once before,” he said.
Even those who applaud Kerkorian’s bid expect that he would not be a hands-on manager at Chrysler. For one thing, Kerkorian’s spokesmen went out of their way Wednesday in announcing the bid to endorse the company’s current management, widely viewed as perhaps the strongest in the automobile industry.
“Clearly, he won’t be involved in running this thing,” said Charles T. Freeman, deputy portfolio manager at the Vanguard Windsor Fund, which owns 15 million shares, or about 3.6%, of Chrysler. But Freeman said he thinks Kerkorian might pressure management to enter into strategic alliances with foreign car makers.
“They’re hanging out a sign to auto companies in the world saying, ‘Come join us,’ ” Freeman said.
Some think Kerkorian is hoping that a foreign auto maker will help finance his offer or even outbid him. That possibility has met with denials from most major foreign car companies, except for two that Iacocca once tried to lure into a deal or even a purchase of Chrysler: Fiat and Volkswagen.
But some observers say a foreign role in Chrysler is not as promising as it might look on paper.
Among other things, Volkswagen under Chairman Ferdinand Piech has cash problems of its own.
“The next time one of these grand alliances works in this industry will be the first time,” said Schnapp. He added that among the obstacles are the towering egos that tend to gather at the pinnacle of the auto business.
“It would be hilarious theater to see Piech and Iacocca trying to cooperate on anything,” he said.
