News: Analysis & Commentary: TAKEOVERS
CHRYSLER: THE INSIDE STORY
You would think Kirk Kerkorian would be getting discouraged. The billionaire gaming mogul's $20.5 billion Chrysler Corp. buyout bid lies in tatters. He hasn't been able to line up financing, he hasn't hired an investment banker, and he can't seem to attract any partners to join him and Lee A. Iacocca in the deal.
But the 77-year-old investor isn't ready to call it quits. He's wooing bankers and weighing a legal challenge to Chrysler's poison-pill defense, say sources close to Kerkorian's investment company, Tracinda Corp. His likeliest next move will be a proxy fight, the sources say. Its aim: to force a vote on his $55-a-share buyout proposal or elect a new slate of directors that backs the plan. Alex Yemenidjian, Tracinda's key dealmaker (page 42), won't divulge his next step but warns: "It would be a mistake to count us out."
Chrysler, meanwhile, continues to adamantly resist a deal. In a May 3 letter to shareholders, Chairman Robert J. Eaton sought to undermine Kerkorian's proxy plans by continuing to raise the prospect of share repurchases and dividend increases. And Chrysler top execs will be visiting big shareholders before their annual meeting on May 18.
For now, Chrysler appears to have the upper hand. In late April, when lawyers for both sides met in New York to discuss proxy procedures, there were fleeting, delicate overtures for a compromise. But sources in both camps say no further talks are scheduled, and both sides now are so angry that the chances for a settlement any time soon seem slim.
How did this deal come to such a standoff? In an account pieced together by BUSINESS WEEK, the buyout effort's long and torturous history is remarkable for its miscues on both sides. Initially, say those close to the deal, Chrysler's brass liked the idea of a management-led buyout, then inexplicably turned hostile at the last minute. Chrysler insiders, meanwhile, say executives listened politely but never backed a buyout. "We told them we were not interested," says one Chrysler source. "They just didn't want to hear it."
AIRPORT PARLEY. The idea of a Chrysler buyout first surfaced in October, the brainchild of Gary Wilson, co-chairman of the company that controls Northwest Airlines Inc. After talking with his old pal Robert A. Day, head of Trust Co. of the West, owner of 7.6 million Chrysler shares, Wilson decided the company was a juicy takeover target. Its stock was down, and its cash approached $7 billion. Wilson decided to propose a management-led effort to take Chrysler private.
Day called up Chrysler's CFO, Gary C. Valade, and asked him to meet with Wilson. Valade agreed to a late November parley at a hotel at Detroit Metropolitan Airport. Wilson walked Valade through a brief presentation, complete with projections of cash flow and industry sales. Sources close to Wilson say Valade worried that Chrysler might become a takeover target and voiced interest in Wilson's proposal. A Chrysler insider says Valade listened but lent no support.
Just as the Valade meeting was coming together, Wilson also approached Kerkorian about throwing his 36 million shares behind the deal. He met with Kerkorian and Yemenidjian in Kerkorian's office just off Rodeo Drive in Beverly Hills, Calif. Kerkorian found Wilson's idea interesting, too, but already was strong-arming Chrysler to boost its stock price by raising its dividend and buying back stock. On Dec. 1, Chrysler took those steps and raised the trigger point for Chrysler's poison-pill to 15% of shares from 10%, giving Kerkorian the option of buying more stock.
At about that time, Wilson ran into Iacocca at a party at Day's house in Los Angeles. Wilson pitched the buyout notion to him, too. Iacocca also expressed interest but didn't sign on. He suggested instead that Wilson take his proposal to Thomas G. Denomme, Chrysler's vice-chairman.
Here, the deal got sidetracked, briefly. After Chrysler announced a 60% dividend hike and a $1 billion stock buyback, the share price spiked to more than $50. With a buyout becoming more expensive, Wilson temporarily lost interest. By March, though, slowing car sales and rising interest rates sent the stock drifting back down to around $40 a share.
On Mar. 30, Denomme and Valade trundled back out to the airport. This time, Wilson presented a more detailed, 25-page plan. A source who knows about Wilson's plan says Wilson explained that the deal could be done with or without Kerkorian and suggested that he be asked to limit his ownership to the current 10%. Again, sources close to Wilson say he got a positive response. But a Chrysler insider contends that "at every step along the way, they were told there was no interest."
CRYPTIC RESPONSE. Nonetheless, Eaton decided to tell board members about the talks. Before the company's Apr. 6 board meeting, Eaton laid out the proposal to executive committee members Robert J. Lanigan, retired chairman of Owens-Illinois; Peter A. Magowan, chairman of Safeway; and Malcolm T. Stamper, retired vice-chairman of Boeing. They did not take the issue to the whole board.
In hindsight, they should have, because events rapidly accelerated. Kerkorian, exasperated by Wilson's slow pace, decided to move decisively on his own. On Apr. 10, Denomme and Valade returned to the Detroit airport for a third presentation, this time from two Tracinda officials, Yemenidjian and Dan Taylor, a financial executive. The duo walked the Chrysler brass through an 11-page presentation. Valade kept his copy, and Chrysler later turned it over to CS First Boston Group, the investment banker heading its anti-takeover defense.
The next evening, Kerkorian startled Eaton, who was in New York, with the news that he intended to push ahead with the buyout. Chrysler sources say Eaton agreed to take the proposal to his board. On Apr. 12, Eaton hopped a Chrysler Gulfstream G4 to Detroit to strategize with top executives and board members. At 9 a.m., Kerkorian rattled windows from Wall Street to Main Street with his blockbuster $20.5 billion bid. Yemenidjian, hoarse from a bad cold, endured a two-hour conference call with dozens of skeptical reporters. He laid out the bare outline of the plan: Use $5.5 billion of Chrysler's own cash as a downpayment, round up partners with $3 billion in equity, and raise $12 billion in loans and other debt. He admitted that none of the financing was in place.
Chrysler, meanwhile, was gearing up for war. During the day, Yemenidjian called William J. O'Brien, Chrysler's general counsel, to ask for the company's response. O'Brien's answer? A cryptic "business is business." Says Yemenidjian: "In retrospect, that was when I first knew we had trouble on our hands." At 7 p.m., after conferring with board members by phone, Eaton released a statement saying the company was not for sale. Yemenidjian complains that top officials never signaled opposition to the deal until it was launched. "It was very clear to us that Bob Eaton was informed, and not once did he say to us, `don't do this, it will be hostile, and we will fight you."'
The following Monday, Apr. 24, Chrysler's board met at the company's sprawling technical center north of Detroit. Directors unanimously rejected the offer, then listened to possible defensive moves presented by Chrysler's bankers. The following afternoon, Kerkorian fired off a blistering letter, demanding that Chrysler put his $55-a-share offer to shareholders, or barring that, raise the dividend to $5 a share. Eaton refused.
How will this battle end? Even if Kerkorian can rally grassroots support among shareholders for a buyout, his biggest hurdle still looks insurmountable: raising the financing. Until he does, the billionaire's plan simply lacks all credibility. For now, at least, Chrysler seems ready to try to wait him out.
OCT., 1994 Gary Wilson, co-chairman of Northwest Air, meets with Robert Day, head of Trust Co. of the West, a Chrysler shareholder. The two discuss Chrysler's sagging stock and the idea of taking the company private.
NOV., 1994 Wilson asks Kirk Kerkorian to put his 36 million shares of Chrysler behind the plan. At a party in Los Angeles, Wilson also talks up the deal with Lee Iacocca. Both indicate interest. Wilson meets with Gary Valade, Chrysler's CFO, and outlines the deal's structure and financing. Chrysler says it did not encourage the bid.
DEC. 1, 1994 Bowing to pressure from Kerkorian, Chrysler announces a 60% dividend increase and a $1 billion stock buyback. The resulting rise in Chrysler's shares dampens buyout planning.
MAR. 30, 1995 Wilson meets Valade and Thomas Denomme, Chrysler's vice-chairman, in Detroit to reiterate the pitch. Chrysler says it again did nothing to encourage the bid.
APR. 25, 1995 Kerkorian angrily demands Chrysler put the buyout proposal to a shareholder vote, even though financing won't be lined up. Chrysler shares fall to around $43, from $49 the day the bid was announced.
APR. 12, 1995 Skipping a scheduled speech at the New York Auto Show, where he was to plug the company's new minivans, Eaton grabs a company Gulfstream G4 back to Detroit for hurried consultations with his board. The board says the company isn't for sale.
APR. 10, 1995 Alex Yemenidjian and Dan Taylor, Kerkorian's key dealmakers, meet with Valade and Denomme in Detroit. They again present the buyout proposal. Chrysler says the executives nixed the idea; Tracinda says they expressed some interest.
APR. 19, 1995 Bear Stearns's Ace Greenberg, Kerkorian's longtime investment banker, bows out of the effort to raise cash for the bid. Prospects for coming up with financing dim.
APR. 11, 1995 Kerkorian telephones Chairman Robert Eaton at Chrysler's Waldorf-Astoria suite to say he plans to proceed with his $20.5 billion buyout. Eaton is noncommittal; says he will present the proposal to the board.
APR. 28, 1995 Kerkorian confirms he has hired D.F. King, a proxy solicitation firm, raising speculation that he will mount a proxy fight for control of the company.
APR. 24, 1995 Chrysler's board meets in suburban Detroit and unanimously rejects Kerkorian's offer.By David Woodruff in Detroit and Ronald Grover in Los Angeles