Was billionaire financier Kirk Kerkorian duped by a bunch of smart auto engineers from Stuttgart? On Dec. 1, his lawyers are scheduled to tell Judge Joseph J. Farnan Jr. of the U.S. District Court in Wilmington, Del., that indeed he was and that DaimlerChrysler (DCX) should pay him compensation of $1.2 billion -- a claim the company is fighting.
The roots of Kerkorian's grudge go back to 1998, when Chrysler merged with Germany's Daimler-Benz. Kerkorian's suit claims that Daimler's Chief Executive J?rgen E. Schrempp promoted the $36 billion deal as a "merger of equals" rather than a takeover. Although that may sound like a distinction without a difference, it had an important consequence for Chrysler shareholders such as Kerkorian, who owned nearly 14% of the company at the time: They weren't paid any takeover premium. The shares they received have since lost 56% of their value, leaving shareholders with little alternative but to take their lumps if they hadn't already bailed out.
Until, that is, two years later when Schrempp opened up to a Financial Times interviewer. In a story in the newspaper's Oct. 30, 2000, edition, he insisted that the auto giant would overcome operating problems at Chrysler to become "the best automotive company in the world," and then let slip a tasty morsel. Far from wanting a "merger of equals," he said, Daimler all along had planned to operate Chrysler as a stand-alone division of Daimler. "We had to go a roundabout way but it had to be done for psychological reasons," Schrempp told the paper. "If I had gone and said Chrysler would be a division, everybody on their side would have said: 'There is no way we'll do a deal."' Schrempp has never disputed the accuracy of the quotes. However, DaimlerChrysler attorney J. Michael Schell says that, based on a transcript of the interview, some quotes were taken out of context. They are, he adds, "comments about the integration process that are irrelevant to the transaction that took place two years earlier."
All the same, it turned out to be a multimillion-dollar foot in the mouth. Since then, DaimlerChrysler's lawyers have been playing defense. In August, the auto maker paid $300 million to settle claims by several large investors who said they were denied a takeover premium in the deal. "This is an issue of being deceived," says Coleman Stipanovich, executive director of the $120 billion Florida State Board of Administration, which shared in the settlement. "Schrempp was just a pompous, arrogant guy who thought he pulled something over on all of us." In a press release, DaimlerChrysler denies any deception, and says the suit "is completely without merit." It adds that it settled because "a local jury could have reached a different conclusion."
Despite that settlement, Kerkorian's suit is no slam dunk. The 86-year-old Los Angeles financier, who controls both the MGM studio and MGM Mirage Inc. (MGG) casino, is legendary for his dealmaking and not someone who is easily snookered. Indeed, he had a big run-in with Chrysler once before. In 1995, Kerkorian launched an ill-fated, $22.8 billion hostile takeover battle and retreated from it only after securing a board seat for one of his associates and an agreement for the company to add $2 billion to an existing $1 billion stock buyback program to raise the stock price. Says Los Angeles corporate litigator Marshall B. Grossman: "If Kerkorian got taken, it would be front-page news."
Kerkorian insists that he was. In a deposition, he says he voted for the merger because he was assured by then-Chrysler CEO Robert J. Eaton that Chrysler executives would remain part of the management team. In a proxy, the companies said that they would share management control and even have headquarters in both countries. That didn't last long: By late 2000, most of the Chrysler executives, including Eaton, had left, and Daimler had dispatched one of its own, Dieter Zetsche, to run Chrysler. He agreed to vote for the deal because the two companies "would be equal merger partners," Kerkorian testified. "And that's the way it went into the proxy."
CHERRY AND WHIPPED CREAM
DaimlerChrysler's Schell counters that as required by German law, the departures were sanctioned by the board of directors -- half of whom were still Chrysler appointees. Besides, the U.S. unit's poor performance was dragging down the parent's earnings at the time. Furthermore, Kerkorian, who sold most of his 44 million shares as the stock was falling, still must show he was damaged by relying on promises made in the proxy, says University of Southern California law professor Eric L. Talley. "He just wants a little cherry and some whipped cream for that sundae," says Schell. Kerkorian's attorney, Terry Christensen, counters that "like all shareholders, he is entitled to a proper price for his shares, and not to be cheated out of a takeover premium."
Farnan, the Delaware judge, may agree. DaimlerChrysler is already smarting from his decision in June that rejected the company's efforts to dismiss the suit -- and lambasted the company for mounting a public-relations campaign to sell the "merger of equals" in the first place. Whether Schrempp's loose lips will cost DaimlerChrysler a big award is still being fought out. But the moral for CEOs is crystal clear: Learn when to say "no comment." By Ronald Grover in Los Angeles, with Gail Edmondson in Frankfurt and Kathleen Kerwin in Detroit