A Las Vegas gamble in search of megabucks
Thursday 13 April 1995
comic circumstances of its launch, it would be wrong to dismiss the bid as a joke, and judging by the jump in the share price, Wall Street certainly
The Las Vegas dateline on the announcement of Kirk Kerkorian's bid for Chrysler yesterday set just the right tone. This is a gamble by a financier whose spokesman was forced to admit he has yet to find equity partners, let alone bankers, to raise the $22.8bn stake to buy the company.
On Wall Street, there were shades of the high old days of the 1980s when we all learned the language of greenmail and to call the odds in the new and intoxicating sport of putting companies "into play". The game in the market yesterday was all about guessing Mr Kerkorian's motives.
It is clearly implausible that this ageing corporate raider seriously wants to have anything to do with running America's third-largest car manufacturer. Mr Kerkorian has been building his 10 per cent shareholding, now worth $2bn, since 1990, and, one must assume, now wants to find a way of cashing in his chips - perhaps by attracting a rival bidder, perhaps by negotiating a friendly price for his holding with the management.
Despite the almost comic circumstances of its launch, it would be wrong to dismiss the bid as a joke, and judging by the jump in the share price, Wall Street certainly did not, though the share price remained below what Mr Kerkorian says he wants to bid, implying that the market wasn't quite sure what to make of it all either.
The involvement of the former Chrysler boss Lee Iacocca lends a measure of stature to the bid, but his own stormy history at the company - not to mention his age - will hardly be the most reassuring development for shareholders. Even so, despite the shapeless way that the deal was presented yesterday, it could still attract the other bidders Mr Kerkorian says he hopes to find. With equity in place, bankers will doubtless follow, as surely as lawyers follow ambulances through the streets of New York.
But the business case that was put forward on Mr Kerkorian's behalf - apparently the old boy himself was too busy to give us his thoughts directly - was so contradictory as to be laughable. There were repeated assurances that Chrysler's management was top notch. He wanted nothing more than to leave them to get on with the job.
Yet in the same breath, Alex Yemenidjian, the spokesman for Tracinda, Mr Kerkorian's vehicle, said the bidders had plans to forge international alliances for Chrysler with as yet unnamed foreign car companies. If that is not interference with the management's cautious return to overseas expansion, what is?
The financing of this big ticket bid clearly also bears close examination. The outline proposal, it seems, is to raise $12bn of debt from banks and other sources (please don't think of mentioning the dreaded term junk bonds). With $1.4bn of debt already on Chrysler's books, the company's total debt would rise by $10.7bn. Mr Kerkorian argues that because of tax breaks on loan interest the $1.1bn cost of servicing the new debt would be no more than the $650m cost of dividends, which are not deductible.
The bid requires at least $5bn equity from investors, including the $2bn Mr Kerkorian has already invested in the company. The balance of $5.5bn is to come from Chrysler's own $7.5bn cash mountain, which Mr Yemenidjian claimed yesterday is far too high.
That cash, according to Chrysler analysts, is there as a prudential cushion against a new downturn in the car market, so that the company can maintain its investment plans and avoid the cycle of failure and cutbacks that has twice before brought it to its knees.
Coincidentally, the bid emerged minutes after Chrysler had produced a disappointing sales forecast for 1995, taking account of the lower than expected prospects for US growth this year. If Chrysler's management is so good, surely its judgement of the necessary size of the cash cushion is at least as good as that of Mr Kerkorian?
Of course, the reality is that Chrysler's shares have performed badly since Mr Iacocca, the man the retail punters loved, leftin 1993, though the performance is not materially worse than that of Ford and General Motors. Like all the big three car makers, Chrysler has been clawing its way back from the horror days of 1990-91. It has begun to sort out some of its long-standing quality problems.
It would be easy to dismiss yesterday's bid as just a pale rerun of a 1980s style corporate raid, by two men whose best days are behind them. Butthere are serious questions too that Chrysler's management must answer.
Statistical sleight of hand?
Full-time jobs have not been in abundance in this recovery. Between this winter and the winter of 1993/4, the number of full-time jobs rose by 204,000, while unemployment fell by 356,000. But yesterday, the Employment Department conjured up a total of 440,000 new full-time jobs.
The good news didn't stop there: the department's statisticians managed to find an extra 160,000 part-time jobs. What is more, the upward revision was made to figures derived from the Labour Force Survey (LFS), which the Royal Statistical Society suggested last week should become the basis for a monthly unemployment count to replace a claimant total that had ceased to command public confidence.
But are the new numbers credible? Part of the increase in full-time jobs came from incorporating new census data in the calculation. That accounted for a total increase of 250,000 full-time jobs, together with a decline of 120,000 part-time jobs. Nothing to dispute there.
What does appear more questionable is another set of changes which have turned up an additional 190,000 full-time and 280,000 part-time jobs. This has come from the Government's decision to apportion those people on government employment and training programmes together with unpaid family workers into full-time and part-time classifications. While it is conventional to include these categories in the employment total, they don't constitute what most people understand to be a job.
One of the principal advantages of introducing a new monthly count of unemployment based on the LFS is that it is compatible and therefore directly comparable with international definitions established by the International Labour Office. But Farhad Mehran, the ILO's chief statistician, said the decision to apportion the two categories into full- and part-time employment "does not make much sense". The ILO has no guidelines in this area. However, it is currently working on a new measure of inadequate employment that would capture under-employment. Mr Mehran believes people on government employment programmes and unpaid family workers should be counted under this definition.
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