Chrysler and Kerkorian Come to Compromise
The struggle for control of Chrysler Corp. ended abruptly Thursday when billionaire investor Kirk Kerkorian agreed to quit buying Chrysler stock for five years in return for one of his allies getting a seat on the board.
The compromise settlement was reached largely on Chrysler’s terms, as its management--backed by a Wall Street community that likes the auto maker’s profitability--rebuffed most of Kerkorian’s demands.
But Chrysler also agreed to buy back another $2 billion of its own stock, extending a Kerkorian-inspired buyback program that has already helped the operator of the MGM Grand Hotel & Casino to roughly double the value his investment in the company to $2.8 billion.
The agreement also settled a messy legal dispute over stock options with Lee Iacocca, Chrysler’s former chairman and Kerkorian’s partner.
The settlement is a surprising denouement to a takeover battle that began 10 months ago with a hostile $22.8-billion bid for the nation’s No. 3 auto maker from Kerkorian, who began buying up Chrysler shares in 1990 when it was worth $12. Today it stands at $56.
The company rebuffed the bid by Kerkorian, 77, and Iacocca, 70, who were scoffed at as “the septuagenarians at the gate.” Iacocca, once seen as a hero for saving Chrysler from bankruptcy, became a focus of derision in Detroit.
At its worst, the takeover saga became a Wall Street soap opera with leaks, accusations and manipulations by bit players. It became a nasty test of wills between men with huge wallets and egos who are used to getting their own way. But in the end, Kerkorian’s failure to win the support of major players on Wall Street doomed his bid.
“Chrysler won, to no one’s surprise,” said Maryann Keller, auto analyst with Furman Selz in New York. “Kerkorian agreed to what he did because he clearly didn’t have the backing of institutional investors.”
“This is a battle that ended with a whimper instead of a bang,” said John Casesa, analyst for Wertheim Schroder in New York.
Kerkorian had sought three board seats and got one, to be filled by James Aljian, a longtime executive of Kerkorian’s Tracinda Corp. and chairman of Lincy Foundation, a charitable foundation set up by Kerkorian. Kerkorian had sought to have Jerome York, a former Chrysler chief financial officer whom he recruited to become vice chairman of Tracinda, elected to the board.
Aljian was elected to the board a day after John Neff, a well-known mutual fund manager who has been close to Chrysler’s management for the last decade. Chrysler’s board now has 14 members.
Kerkorian won board representation only in exchange for dropping his takeover efforts for at least five years. Kerkorian remains Chrysler’s second-largest shareholder with about 13.6% of its stock, or about 51.9 million shares.
As part of Thursday’s agreement, Chrysler and Iacocca agreed to drop lawsuits filed after the company refused to honor $42 million in stock options owed Iacocca. In aligning himself with Kerkorian and bad-mouthing the company, Iacocca breached a contract, Chrysler said.
The settlement requires Chrysler to pay Iacocca $21 million and Kerkorian to pay him $32 million--an extra $11 million to reflect the stock’s recent appreciation.
Iacocca also agreed to leave Tracinda, and to refrain from criticizing Chrysler for five years. A spokeswoman at Iacocca’s office in Los Angeles said he had no comment.
Chrysler agreed to broaden its current stock buyback program, doubling stock purchases in 1996 to $2 billion and buying another $1 billion in 1997. Buybacks typically increase stock prices.
Chrysler shares were off $1.625 to $56.75 on the New York Stock Exchange on Thursday before trading was suspended pending the company’s announcement. Chrysler’s stock was languishing at about $39 a share when Kerkorian initiated his takeover last year. He is credited with helping to drive the price up by forcing the company to buy back stock and raise the dividend.
After giving up his original takeover fight--which would have been the second-largest in corporate history--for lack of funding, Kerkorian continued to criticize Chrysler’s management for being too fiscally conservative and not doing enough to increase shareholder value. He threatened a proxy fight.
However, the company was able to convince the bulk of Wall Street money managers that Chairman and Chief Executive Robert Eaton--Iacocca’s hand-picked successor--had set a good course. He has overseen Chrysler’s continued improvement to become the industry’s most profitable and low-cost producer, with its vehicles among the most stylish.
Despite a slow sales market and costs of launching its new minivan, Chrysler earned $2 billion last year. Most analysts are predicting stronger earnings this year.
In recent months, as Chrysler’s performance improved, Kerkorian and his aides had become much less strident in their criticism. This may have also reflected the growing realization that he could not win a proxy fight and needed a graceful way to exit.
“This agreement creates substantial economic benefits for all Chrysler shareholders,” Kerkorian said in a statement.
