Kerkorian Scraps Bid for Chrysler, at Least for Now
Billionaire investor Kirk Kerkorian withdrew his $22.8-billion takeover offer for Chrysler Corp. on Wednesday in what amounted to a major admission of defeat--but the action is unlikely to end his bitter battle for the company.
Kerkorian, a savvy takeover veteran, said that he will pursue other ways to increase the value of his 10% stake in Chrysler and retained the New York-based investment banking firm of Wasserstein Perella & Co. to advise him on his next step.
The hiring of Wasserstein Perella, a well-known merger specialist, raised the prospect that another buyout bid would emerge in the coming months. A source close to Kerkorian, Chrysler’s largest shareholder, confirmed that possibility.
“This is the end of a major skirmish--not the war,” agreed Joseph Phillippi, analyst for Lehman Bros., a New York brokerage.
The withdrawal of the $55-a-share bid reflected what investors had already figured out: The hostile offer made by Kerkorian and former Chrysler Chairman Lee A. Iacocca on April 12 had no chance because it lacked financing.
The Chrysler buyout offer stirred unusually strong emotions. Many in Detroit viewed it as a betrayal by Iacocca, the man once seen as Chrysler’s savior. Others saw it as emblematic of what’s wrong with the U.S. financial system: a well-run company being pressured to forsake long-term goals to satisfy the short-term demands of major investors.
The proposed takeover would have been the second-largest in U.S. corporate history, behind only the $25-billion acquisition of RJR Nabisco by Kohlberg Kravis Roberts in 1989. The seven-week-old battle was reminiscent of the heady merger mania days of the 1980s, when hostile takeovers, leveraged buyouts and corporate raiders dominated financial news.
Not long ago, the nation’s No. 3 auto maker would been an unlikely target for an unfriendly takeover. Chrysler, incorporated in 1925, was saved from bankruptcy by a federal bailout engineered by Iacocca in 1979 and again faced collapse in 1989. But after a major restructuring, Chrysler emerged in the 1990s as the best of the U.S. auto industry.
The auto maker earned $3.7 billion in 1994. Yet its stock dropped nearly 30% from the end of 1993 to the beginning of this year. Some stockholders began to grumble about its lackluster performance on Wall Street.
Some experts saw Kerkorian’s bid as a “mock offer” designed to put Chrysler into play, with the hopes that another suitor--possibly a foreign auto maker--would emerge and drive the stock price up. But no other bidders appeared.
(Chrysler stock moved up $1 to close at $43.625 Wednesday in heavy trading on the New York Stock Exchange. The jump came on a day the Dow Jones industrial average soared 86.46 points to a new record and the stocks of all auto makers showed strong gains.)
While the proposed takeover had implications for the auto industry and the nation’s economy, the personalities involved drew the most attention.
On one side were Kerkorian, 77, the reclusive Las Vegas wheeler-dealer and owner of the MGM Grand Hotel and Casino, and his friend Iacocca, 70, an inveterate car huckster forced to retire from Chrysler in the early 1990s.
On the other side was Iacocca’s largely untested successor--Chrysler Chairman Robert J. Eaton, a mild-mannered, unassuming executive with old-fashioned values. The battle was strictly hardball--and sometimes petty. Eaton pressured bankers not to lend money to Kerkorian, while Chrysler’s board threatened to remove Iacocca’s name from an executive tower being built in Auburn Hills, Mich.
Iacocca questioned Eaton’s management, saying he was not addressing the firm’s quality-control problems adequately. Kerkorian complained that Eaton lied about meetings they had and turned a friendly deal into a hostile one.
While Eaton can claim victory in this round, analysts said that pressure will remain on Chrysler as long as Kerkorian remains the largest shareholder and the stock price remains low.
“It’s a Pyrrhic victory for Chrysler,” said Nicholas Lobacarro, analyst for S. G. Warburg & Co. in New York. “It’s little consolation that you beat a takeover but the stock price is languishing.”
Chrysler officials declined public comment. But a spokesman said that the company saw little reason to gloat since Kerkorian appears to be simply regrouping. “What’s there to celebrate?” said the official. “He is cleaning the slate to come back at us in another way.”
A spokesman for Kerkorian said the decision to rescind the spurned buyout offer was not a surrender. Rather, he said, it was a tactical decision that will give him more flexibility in making his next move.
“Withdrawing our offer will permit us to take a fresh look at the situation and evaluate our alternatives,” said Alex Yemenidjian, a spokesman for Kerkorian.
Advisers for Kerkorian--who owns his Chrysler shares through his Las Vegas-based Tracinda Corp.--said his stock is not for sale and he remains committed to maximizing value for all shareholders.
Wasserstein Perella, a well-regarded name in merger-and-acquisition circles, will serve as general strategic adviser to Tracinda and will help Kerkorian in evaluating options relating to his 36 million Chrysler shares. The shares are worth nearly $1.6 billion.
Chairman Bruce Wasserstein could not be reached for comment, but he said in a statement that Kerkorian is a long-term investor with a strong record. “We hope to provide a new perspective and play a constructive role in achieving Tracinda’s objectives,” he said.
In addition to handling mergers internationally, the firm underwrites equity and junk-bond offerings and provides asset management services. Recently, it served as an appraiser in AT&T;’s proposed merger with LIN Broadcasting, advised a General Motors’ pension fund on a large stock sale and has advised SmithKline Beecham in a series of health care transactions.
Kerkorian did not have an investment banker when he made his initial bid. He attempted to retain Bear Stearns & Co., but that company withdrew because of its business dealings with Chrysler.
Analysts said with Wasserstein on board, Kerkorian will be able to restructure his deal in a way that may make it more palatable financially. Some investors complained that Kerkorian was going to put no additional cash into the deal (beyond his 10% ownership), but the deal would have burdened Chrysler with $12 billion in debt.
“The deal looked like a flywheel that was losing momentum,” said Phillippi. “With Wasserstein on board, it is at least spinning again.”
Others, however, suspect that Kerkorian is looking for another large investor--possibly another auto company--to buy his stake at a slight premium to the market price. Another possibility is that he may try to enlist more support from other major shareholders in hopes of putting greater pressure on management to take steps to boost the stock price.
“Kerkorian has taken the most graceful exit,” said David Cole, executive director of the Office for the Study of Automotive Transportation at the University of Michigan. “But Chrysler is still vulnerable because it’s undervalued.”
Chrysler has attempted to keep shareholders happy by increasing its annual dividend 20% and promising to expand a $1-billion stock buyback program later this year.
But these steps have failed to bolster the stock much, mainly because they coincided with a slump in auto sales. Most analysts have lowered Chrysler’s earnings projections for the next two quarters because of weaker sales, higher incentives and a slow launch of its redesigned 1996 minivan.
Kerkorian first began investing in Chrysler in 1990 when it was struggling to regain its financial balance. While praising management, he criticized Chrysler for amassing a $7.5-billion cash cushion. The company argues it needs the rainy-day funds to pay for product development during an economic slump. Kerkorian proposed using 70% of the fund to finance his takeover.
Eaton’s handling of the matter has drawn high marks. Two weeks ago at the company’s stockholder meeting, several shareholders praised Chrysler’s management for resisting the takeover.
Still a tense and weary Eaton told reporters the takeover battle was taking a toll on Chrysler. “Clearly Mr. Kerkorian has been a very disruptive force in the company,” he said at the time. “And I would hope this would go away and we could get back to building good cars and trucks.”
* WHAT IT MEANS: Lessons from failed bid. D1
* LEE’S LEGACY: Iacocca bruised but intact. D2
