Eyeball-to-Eyeball : Chrysler Execs to Meet Kerkorian Forces

When billionaire Kirk Kerkorian made his startling $22.8-billion takeover offer for Chrysler Corp. in April, the auto maker mounted a surprisingly strong and successful counterattack.

Kerkorian’s troops were left looking like the gang that couldn’t shoot straight. The Las Vegas casino and hotel operator had to withdraw his bid in June because he didn’t have the financing.

Kerkorian and his backers, including former Chrysler Chairman Lee Iacocca, were embarrassed but not discouraged. Kerkorian has since regrouped by assembling a team of financial sharpshooters that again has Chrysler in its sights and the firm’s management dodging bullets. Some insight into Kerkorian’s strategy may emerge today when Jerome York, vice chairman of Kerkorian’s Tracinda Corp. and leading Chrysler strategist, meets with top Chrysler executives. (The location of the meeting was not disclosed.)

It is not likely to be a friendly get-together. Kerkorian has thrown a barrage of criticism Chrysler’s way in recent weeks. Numerous news stories, some based on leaked internal Chrysler documents, have raised questions about the auto maker’s product quality, conservative financial strategy and executive pay.

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In the last six weeks, Kerkorian--one of the nation’s wealthiest men and Chrysler’s largest shareholder, with a 14.1% stake--has mounted a new assault on Chrysler and its management team headed by Robert Eaton, chairman and chief executive.

If nothing else, Kerkorian has the company and investment community guessing what his next move will be. “That’s the threshold question,” said a top Chrysler executive. “We are puzzled.”

At this point, it appears unlikely that Kerkorian will mount another takeover bid, because of Chrysler’s anti-takeover defenses and the high cost. His first offer was for $55 a share and a new one might go as high as $70, requiring $25 billion in financing.

But if Chrysler continues to resist his entreaties as expected, Kerkorian may mount a costly proxy fight. He could seek seats on Chrysler’s board of directors, try to replace the entire board or attempt to win shareholder votes on some of his strategic initiatives.

“I give him a 50-50 chance of winning a proxy fight,” said E. Han Kim, a finance professor at the University of Michigan.

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Chrysler hired its own team of pricey advisers and launched an advertising campaign extolling the company’s record and raising questions about Kerkorian’s motives. Eaton, who is in Japan this week and will not meet with York, charged Kerkorian with “trashing” the company and hurting sales.

“It’s starting to get ugly,” said Joseph Phillippi, an analyst for Lehman Bros. in New York.

The struggle intensified after Kerkorian hired York, the chief financial officer of IBM Corp. The West Point graduate is highly regarded on Wall Street and is known as a vigilant cost cutter.

York, who was passed over for Chrysler’s top post in 1992, was lured to Tracinda with a $25-million compensation package and a potentially lucrative value-sharing agreement tied to the performance of Chrysler’s stock.

His first task was to do an intensive financial analysis of Chrysler. York declined a request to be interviewed, but in a recent speech he cited some worrisome trends he said he has already detected at Chrysler: fixed costs were up from $8 billion in 1992 to $10.5 billion this year; warranty costs were up 50% in 1994, close to $2 billion; car quality lags competitors; top executives got 9% increases in bonuses despite missing key quality goals.

Chrysler executives argue that York’s statements are based on data taken out of context. They say fixed costs in part reflect inflation and the company’s growing size. Quality has improved dramatically in recent years and warranty costs reflect some one-time adjustments made in 1994. And bonuses were not excessive given record profits of $3.7 billion last year, they say.

The biggest disagreement, however, centers around Chrysler’s use of its excess cash. As of Sept. 30., the company had set aside $6.4 billion and has a goal of saving up $7.5 billion to ride out the next recession.

But York argues that Chrysler needs only $4.5 billion to $5 billion. The company went through about $4 billion in the last recession, when Chrysler was in a much weaker financial condition.

The company says Kerkorian and York are out of touch with the auto industry. However, in what appears to be a recent softening of opinion, Chrysler executives recently said the cash could also be used to make strategic investments, such as joint ventures abroad.

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Kerkorian has had other impacts on the company as well. Under pressure in May, the board increased the dividend 25% to $2 annually and last month doubled the stock buyback program to $2 billion. The company is considering more buybacks beyond 1996.

These steps have helped boost Chrysler’s stock price from $39 in April, before Kerkorian’s original takeover offer, to more than $50 a share recently. It closed Tuesday down 37.5 cents at $52.625 in trading on the New York Stock Exchange.

Still, Kerkorian is pushing Chrysler on other fronts. At this week’s meeting, York is expected to ask Chrysler to ease its “poison pill,” an anti-takeover provision that dilutes the stock holdings of any shareholder that accumulates 15% or more of the company’s shares.

York may also ask the company to allow shareholders to approve major deals involving “blank-check preferred stock,” a special class of stock that can be issued by the board. This allows the board to place stock in friendly hands if the company is threatened by a hostile takeover.

In addition, York is likely to ask that Tracinda be granted representation on the board. But Chrysler, which has dug in its heels, is unlikely to adopt any actions that would aid Kerkorian without a fight.

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“My guess is we will get a proposal, we won’t like it and we will have a battle,” said one Chrysler executive.

Both sides are looking for allies by taking their cases to major institutional investors, who are likely to decide any proxy fight. Eaton met last week with major investors in Los Angeles, New York and Boston.

Chet Needleman, head of Palley-Needleman Asset Management, a Newport Beach money management firm that owns 2 million Chrysler shares, is taking a neutral position and will back whoever has the best plan for increasing the stock price. But he said Kerkorian has a hard case to prove given that Chrysler is the industry’s low-cost producer, has good new products and its stock has gone up fivefold since 1992.

The struggle may still be in the early stages with no outcome before Chrysler’s annual meeting next spring. One reason is that Kerkorian may not only be interested in seeking strategic changes to boost Chrysler’s stock, but also in finding a way to take his profits without forcing a collapse in the price.