Torpedoed Takeover : Kerkorian Bid Shows How the Merger Game Has Changed in the ‘90s

When billionaire Kirk Kerkorian launched his brash $22.8-billion takeover offer for Chrysler Corp. in April, he was labeled a throwback to the corporate raiders of the go-go 1980s.

But Kerkorian proved anew Wednesday how much the takeover game has changed in the past five years.

Kerkorian’s Tracinda Corp. pulled its offer for Chrysler after the $55-a-share cash bid drew a lukewarm reception on Wall Street and was steadfastly rejected by Chrysler itself.

Tracinda, which still owns 10% of Chrysler, said it will review its options, and analysts agreed it would be foolish to count Kerkorian out just yet.

The reclusive son of Armenian immigrants didn’t get to be a billionaire by making mistakes. Indeed, in the past five years he’s spent $675 million to buy Chrysler stock that today has a market value of $1.6 billion.

But Wall Street’s doubts about Kerkorian’s ability to buy Chrysler have been evident almost from the beginning. Although the auto maker’s shares soared 24% to close at $48.75 on April 12, when Kerkorian’s bid was announced, the stock has been drifting lower ever since. Shares closed Wednesday at $43.625, up $1, in New York Stock Exchange trading.

Kerkorian’s proposal “wasn’t well-conceived from the start,” said one Wall Street arbitrager.

Alex Yemenidjian, a top executive at Las Vegas-based Tracinda, vehemently denied that the firm made any mistakes in pursuit of Chrysler. But merger experts say Kerkorian did make several missteps that, for now at least, have torpedoed his chances and provide lessons about how corporate takeovers are being handled in the 1990s.

Lesson No. 1: Kerkorian made his offer public before securing the boatload of cash needed to get the deal done.

That maneuver may have worked in the 1980s, when raiders forced many targets to their knees merely by having their banker--former junk bond kingpin Michael Milken--promise to raise the needed financing through sales of the high-yield securities.

But in 1995, even a prominent financier such as Kerkorian must prove he’s got the money lined up or face “a highly skeptical” audience on Wall Street and redoubled efforts by the target company’s management to fight the attack, said Robert Profusek, a partner at the law firm Jones, Day, Reavis & Pogue.

Yemenidjian said Tracinda intentionally avoided raising the financing in advance because, under securities regulations, Kerkorian would have been forced to publicly disclose those arrangements before formally announcing his offer. That would have tipped off Wall Street that something was coming, he said.

Lesson No. 2: Kerkorian badly misjudged Chrysler’s ability to defend itself. The company warned its commercial banks not to lend Kerkorian the cash he needed--unless the banks were willing to lose Chrysler’s future business.

The banks obliged.

“This is one area where they did underestimate the muscle that Chrysler has in the financial marketplace,” said one source familiar with the battle. “Chrysler was able, legally and properly, to say to the rest of the world, ‘If you go on his side of the street, you’ll be sorry.’ ”

Yemenidjian confirmed that Chrysler saw to it that banks “wouldn’t lend to us.” But he said that occurred after the auto maker first “led us to believe” that Kerkorian could expect a “friendly” reception and instead “turned on us.”

Lesson No. 3: Merely griping that your takeover target isn’t properly employing its excess cash, as Kerkorian did regarding Chrysler’s current hoard of $7.5 billion, isn’t always enough to win over other stockholders.

Kerkorian, in fact, went so far as to praise Chrysler’s management of its operations.

“Chrysler is probably the worst firm you’d want to attack for accumulating cash, given its history” of nearly filing for bankruptcy in 1979 and the frequent ups and downs of the auto industry, said Michael H. Bradley, a finance and law professor at the University of Michigan.

It’s not a simple matter that any takeover target can just say no as Chrysler did. Corporate mergers, after all, are still sizzling these days after reaching a record high value of $339.4 billion in 1994, according to research firm Securities Data Co.

But the vast majority of those deals are so-called strategic mergers, whereby one company buys a related company in hopes of gaining market share in its field. That trend has fueled speculation that Kerkorian will eventually enlist another auto maker to help in his bid for Chrysler.

* THROWING IN THE TOWEL

Kirk Kerkorian withdraws Chrysler bid. A1

* DULLED LUSTER

Iacocca’s reputation tarnished but intact. D2

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Kerkorian’s Chrysler Odyssey

Since Las Vegas billionaire Kirk Kerkorian’s holding company, Tracinda Corp., began buying Chrysler Corp. stock at $12.25 a share in 1990, the price has fluctuated from a low of $10 to a high of $62.50.

Dec. 14, 1990 * Initial investment made: Tracinda Corp. spends $272 million to purchase 22 million Chrysler shares--a 9.8% stake in the company. Fearing Kerkorian’s intentions, Chrysler’s board lowers the trigger for its anti-takeover “poison pill” to 10% from 20% ownership of common shares. Despite the announcements, Chrysler shares close unchanged at $12.25.

Oct. 10, 1991 * Additional shares purchased: Tracinda increases its holdings, buying 6 million shares for $10.12 each. Chrysler stock rises to $10.25, up 12.5 cents. In additional acquisitions, the company purchases 4 million shares at $38.75 each in February, 1993 and another 4 million shares in December, 1994.

1. Jan. 18, 1994 * Chrysler stock rises: Stock hits $62.50 (reaching that level again on Feb. 3).

2. Nov. 14, 1994 * SEC documents filed: Kerkorian asks federal officials for permission to increase his holdings to 15%. Chrysler shares rise 88 cents to $49.88.

3. Dec. 1, 1994 * Chrysler seeks to appease: The auto maker announces a 60% dividend increase and a $1-billion stock buyback; shares slip 75 cents to $47.75. The company relaxes its poison pill provision by increasing the percentage of stock a single investor can control, to 15% from 10%.

4. April 12, 1995 * Takeover bid proffered: Kerkorian and former Chrysler Chairman Lee Iacocca team up to make a $20.8-billion takeover bid for the company, sending the share price soaring $9.50 to $48.75.

5. April 24, 1995 * Bid formally rejected: Saying the plan would strip it of its rainy-day cash fund, Chrysler rejects the buyout proposal, causing the share price to fall 62.5 cents to $44.50.

6. May 18, 1995 * Dividend increase: Chrysler raises its dividend 25% to $2 a share, causing its stock price to fall $1.25 to $42.63.

7. May 31, 1995 * Kerkorian withdraws: The investor scraps his offer because of lack of financing. However, he hires investment banking firm Wassersteing Perella as an adviser, a sign that he is keeping his options open. The company’s share price, which has declined steadily since the original offer, closes up $1.00 at $43.63.

Sources: Associated Press, Times reports; Researched by JENNIFER OLDHAM / Los Angeles Times

Tracinda Corp.

The holding company, named for billionaire Kirk Kerkorian’s daughters Tracy and Linda, has pursued a variety of investments, from movie studios to commercial airlines. * Headquarters: Las Vegas * Chief executive: Kirk Kerkorian * Year founded: 1976 * Employees: 8,500 * Current holdings: 70% stockholder of Las Vegas-based MGM Grand Inc., which includes the $1-billion, 5,005-room MGM Grand Hotel (the world’s largest hotel and casino) and the MGM Grand Theme Park. Also holds 10% share of Chrysler and 5% share of Viacom.

Sources: Dun & Bradstreet, Fortune, wire reports

Researched by DAVID NEIMAN / Los Angeles Times