NEWS ANALYSIS : Bid Puts Chrysler Chairman in the Hot Seat : Autos: Robert J. Eaton’s management has been widely lauded. So why did Kerkorian launch a takeover battle?

Chrysler Corp. Chairman Robert J. Eaton could hardly be blamed for gloating a bit earlier this year. His company, all but given up for dead twice in the past two decades, had emerged as the crown jewel of the U.S. auto industry.

At a gathering of the world’s news media at the North American International Auto Show, Eaton bragged that 1994 had been the best in the company’s 69-year-history. It had posted record sales and record profit.

Chrysler was also the world’s lowest-cost producer, and it made more money per vehicle than anyone else. Even Toyota was tearing apart Chrysler vehicles to figure out how they had been made so cheaply and efficiently.

“They are doing a slam-bang job for Detroit,” Mayor Dennis Archer said of the company last week at Chrysler’s announcement of a $750-million investment in an engine plant near the city’s downtown.

But investor Kirk Kerkorian’s unexpected $22.8-billion proposal last week to acquire Chrysler has suddenly put Eaton’s record under closer scrutiny. The hostile takeover battle is also shaping up as a plebiscite on Eaton’s management.

After all, if Chrysler is such a profitable, well-run company, why should Kerkorian, its biggest stockholder--who says he wants to keep current management--be so dissatisfied as to undertake an unfriendly battle for control?

Although he is widely lauded, critics note, Eaton has also had the good fortune to run the company only in good times.

“His mettle has never been tested,” said Eugene Jennings, a retired Michigan State University management professor who has written extensively about the auto industry.

Some critics also cite the recent poor performance of Chrysler’s stock and say Eaton is too cautious and lacks vision. For example, they say, Chrysler needs a more aggressive global strategy to help it better withstand the next industry downturn.

However the question of Eaton’s management is decided, Kerkorian’s $55-a-share offer has shaken Detroit, a city whose roots reek of gasoline. City officials, community groups, workers and others express both awe and apprehension over the proposed buyout.

The plan is the talk of Wall Street and the auto world not only because of its immensity--it could be the second-largest in U.S. history--and the colorful cast of characters, but also because many believe Chrysler does not deserve such a fate.

Chrysler rejected Kerkorian’s proposal, which it described as highly leveraged, but said it would evaluate it if Kerkorian obtained financing.

Kerkorian, a billionaire investor joined by former Chrysler Chairman Lee A. Iacocca in the bid, is proposing to buy the 90% of Chrysler stock he does not already own, with $5 billion in investor equity, $12 billion in debt and utilizing $5.5 billion of Chrysler cash. He is putting no new money up but is using $2 billion in stock he controls.

Kerkorian’s holding company, Tracinda Corp., said Sunday that there is “a lot of interest” among unidentified potential financing and equity sources. A spokesman for Tracinda said there is also interest among unnamed foreign companies in forging a strategic alliance with Chrysler, but he added that Tracinda’s first priority is to secure financing for the deal.

Industry experts and Wall Street analysts say that if Kerkorian can find financing, Chrysler will have to seriously consider his offer or come up with a counterproposal. With the auto maker now in play, other suitors--including foreign auto makers--could emerge with higher bids.

That Chrysler is in this position at all is a surprise to many. The auto maker avoided bankruptcy in the late 1970s only with the help of a government bailout. After recovering in the mid-1980s, it stumbled again with poor products and an ill-advised foray into diversification.

When the economy slumped at decade’s end, Chrysler was again a financial basket case. Enter Kerkorian.

The now-77-year-old investor, who has amassed a fortune through astute buys in airline and entertainment companies, began amassing Chrysler shares when the stock sold for $12. Today, with 10% of the stock, he is the car maker’s largest shareholder.

When Kerkorian began buying into the company, Chrysler was being revamped from top to bottom. Most important, it was changing the way it built cars by implementing a team approach. Unlike in the past, each vehicle was developed from beginning to end by a unified group that included design, marketing, engineering, purchasing and manufacturing employees.

The new way of doing business made Chrysler immensely more efficient.

Iacocca, now 70, wanted to stay at the helm of Chrysler as the good times set in. But the board insisted that he retire at the end of 1992. He reluctantly picked Eaton, head of General Motors Corp.’s European operations, as his successor.

Eaton was the compromise candidate when the board could not agree on whether to promote Chrysler President Robert Lutz or rehire former Vice Chairman Gerald Greenwald, who had left the company in 1990 to attempt a takeover of United Airlines.

The new chairman and chief executive could not have been more different from his predecessor. Iacocca is flamboyant, autocratic and larger than life; Eaton, 55, is conservative, a team builder and down-to-earth.

These traits are apparent in Eaton’s running of Chrysler for the past two years.

He recognized that the company had a strong product lineup and management structure--and did not mess with them. Instead, he focused on improving the balance sheet. He sold off non-core assets to reduce debt. The company’s pension fund was paid up for the first time in 40 years. Its credit rating improved and borrowing costs fell.

With cash flowing in, Eaton earmarked $23 billion for development of new vehicles. More important, he set out to end Chrysler’s boom-and-bust behavior. He set aside $7.5 billion as a rainy-day fund to help the auto maker through the next recession.

“We have got to quit getting sick,” Eaton said. “I want to be the first chairman in the history of Chrysler not to have to lead the company back from the brink of bankruptcy.”

To do that, Eaton also mapped out a cautious global strategy. He believes joint ventures and strategic alliances in foreign markets are unworkable. Instead, he has increased U.S. exports and looked for expansion opportunities in key markets such as China.

The approach has apparently paid off. Chrysler earned $3.7 billion last year, and its products--such as the Jeep Grand Cherokee, Dodge Caravan and LH sedans--are popular.

“He has done a terrific job,” said David Cole, executive director of the University of Michigan’s Office for the Study of Automotive Transportation. “The company has good management and good products.”

Even Kerkorian seems to agree. “Bob Eaton and his management team have done an excellent job,” said Alex Yemenidjian, a top executive of Las Vegas-based Tracinda.

But at the same time, Kerkorian has taken Eaton to task on two issues: the $7.5-billion cash reserve and slowness in developing global operations. And Iacocca last week criticized Eaton’s efforts in improving product quality.

In a letter to the Chrysler board in November, Kerkorian urged it “invest its surplus cash for the benefit of all shareholders” and take other steps to boost the stock price.

The next month, the board increased the dividend and announced a $1-billion stock buyback. The moves temporarily boosted the stock price, but as the auto market began to weaken in January, it receded.

The stock, which traded as high as $63.50 a year ago, closed at $47.875 on the New York Stock Exchange on Thursday. (Stock markets were closed Friday.) It had risen $9.50 on Wednesday to $48.75 after Kerkorian’s takeover was announced.

The poor performance of Chrysler’s stock is being interpreted in some quarters as a vote of no confidence in Eaton. “He is too cautious,” said Jennings. “He doesn’t have a good vision for the future.”

Kerkorian argues that Chrysler needs a more aggressive global strategy. He says the company is more vulnerable to the effects of a U.S. recession than its competitors because of its sparse international operations.

However, there is wide disagreement on Chrysler’s global strategy and the need for a large cash reserve. Douglas Fraser, former president of the United Auto Workers, said the reserve provides a good cushion for the next downturn. “I think it is very prudent,” he said.

But that it is not a very productive use of corporate funds, said E. Han Kim, a finance professor at the University of Michigan in Ann Arbor.