The Gloves Are Coming Off At Chrysler

As head of Chrysler Corp.'s Mexican operations in the early 1980s, Jerome B. York would scour local dealerships alone on weekends, looking for poorly built K-cars. When he found one, York bought it and drove it back to the factory to show workers where they had failed. "Within 24 hours, all 5,000 employees in Mexico knew," York says. "It sent shock waves through the troops."

York, 57, spent 14 years at Chrysler shaking things up as an aggressive, whip-smart engineer. By the time he left for IBM in 1993, he had risen to chief financial officer and had built a reputation as a driven loner and demanding cost-cutter, the kind of executive who enjoyed keeping secrets and springing surprises.

Now, as billionaire investor Kirk Kerkorian's new right-hand man, York is ready to spring a few surprises on his former colleagues at Chrysler. While he will say little publicly about his plans to boost the value of Kerkorian's 13.6% stake in the carmaker, York is readying a full-scale assault to begin within a month, according to sources familiar with his strategy. His aim: to join Chrysler's board, oust hostile directors, and prod the auto maker to shift as much as $2 billion of its $6.9 billion cash reserve into a stock-buyback program. Ultimately, say associates, York has his sights set on dethroning Chrysler Chairman Robert J. Eaton.

To pull that off, York is expected to orchestrate a chorus of criticism of Eaton's management style and the company's uneven record of vehicle quality. If York can undermine Eaton with powerful institutional shareholders, he stands a better chance of winning a proxy solicitation battle to accomplish at least some of his goals. Says a source close to Kerkorian's Tracinda Corp. investment firm, where York was named vice-chairman on Sept. 5: "The gloves will come off" soon.

It's a long-shot strategy. Tossing out Eaton would be a tough sell to institutional shareholders: They have been wowed by Chrysler's stellar financial and sales performance under Eaton, who succeeded Lee A. Iacocca as chairman in 1993. Indeed, Chrysler shares are up more than 40% since April. Even investor Robert Day, the Trust Co. of the West leader who was a catalyst behind Kerkorian's first run at Chrysler, is backing away from the Tracinda camp. Day recently sent Eaton a letter informing him that TCW is no longer aligned with Kerkorian.

But after being soundly beaten in his $20.5 billion takeover attempt last April, Kerkorian seems willing to fight long odds. Kerkorian resents how Eaton strong-armed banks into shunning Tracinda's buyout offer and believes that Eaton misled him about how Chrysler would respond to the deal. "What does Kirk Kerkorian want? He wants Bob Eaton gone," says one Wall Street analyst.

HIT LIST. To reach that endgame, Kerkorian and York are gunning for several influential Chrysler directors. Their likely targets: former Kmart Chairman Joseph E. Antonini, former Carter Cabinet secretary Joseph A. Califano, and retired Boeing Vice-Chairman Malcolm T. Stamper. The three infuriated Iacocca, Kerkorian's friend and paid consultant, by forcing him to retire as chairman at the end of 1992. The probable hit list also includes Chrysler Vice-Chairman Thomas Denomme, Eaton's agent in talks with Tracinda last spring.

Even while Tracinda wrestles with Chrysler's board, York will be nagging Eaton to free up cash. Under pressure from Kerkorian, Chrysler has already doubled its dividend, to $2 a share, since late last year and instituted $2 billion in stock buybacks. Rumors spread on Sept. 19 that Chrysler would keep cash away from Kerkorian by buying Volvo, but a source close to the Swedish carmaker says the companies have only discussed a joint venture. Eaton, to be sure, has been loath to further carve up the cash reserves he believes Chrysler needs to develop new products in the next sales downturn.

But York isn't buying that argument. Neither does he buy into Eaton's emphasis on corporate teamwork. A West Point graduate and disciple of Iacocca's top-down, chain-of-command style, York subtly intimates that Chrysler could flourish better under tighter rule. "The business purpose of teamwork is to produce results, not to create teamwork for its own sake," York says.

WEIGHING MOVES. York is soft-pedaling criticism of Eaton's results for now. And he lauds Chrysler President Robert A. Lutz, suggesting the board let him stay on as chief operating officer after he turns 65 in 1997. But in conversations with investors, other Kerkorian operatives are quietly calling Eaton an "indecisive" leader who doesn't push hard enough to improve Chrysler's lagging auto quality, say Wall Streeters.

Still treading lightly, York accepted Eaton's refusal to meet with him, settling for a standard, state-of-the-company presentation on Sept. 19 from a Chrysler team headed by CFO Gary C. Valade. If his forthcoming overtures are rebuffed, however, expect York to turn aggressive. First stop: Wall Street, where his glowing reputation as CFO at both Chrysler and IBM ensures that he will, at least, get a fair hearing.

But there's little chance York will find any support at Chrysler, where executives are girding for another nasty fight. "We have recognized since last April that Tracinda was not a friendly shareholder and they had their own agenda based on self-interest," says Denomme. And Lutz, for one, says: "I would ten times rather work for a Chrysler run by Bob Eaton than a Chrysler run by Jerry York." To head off Kerkorian, Eaton met last month with a half-dozen Chrysler investors. He plans to address the annual meeting of the Council of Institutional Investors Oct. 3 in New York.

While the battle may heat up fast, Kerkorian is in no hurry to get what he wants. "Before he makes a move he gives it a lot of thought," York says. And like his 78-year-old boss, York knows there are many moves yet to go. "Think of this as a chess game, and at some point you want checkmate," he says. "Checkmate is a material increase in market value." And for York, perhaps, something more: Eaton's job.


The Tracinda vice-chairman's probable game plan


Boot hostile directors. Possible targets: former Kmart Chairman Joseph Antonini, former HEW Secretary Joseph Califano, retired Boeing Vice-Chairman Malcolm Stamper, and Chrysler Vice-Chairman Thomas Denomme.


Win an insider's role by attempting to replace one of the deposed board members with a Tracinda representative, likely York himself. This would probably be accomplished via a consent solicitation of the auto maker's large institutional investors.


To weaken Chrysler's management, Tracinda executives are quietly attacking Chrysler Chairman Robert Eaton's leadership style. York's prime focus: Chrysler's spotty record on vehicle quality.


To build support with shareholders, York wants Chrysler to reduce its cash reserves to $5 billion from its current $6.9 billion, shifting the extra money to a stock buyback program.

Before it's here, it's on the Bloomberg Terminal.