Chrysler Almighty

The American car-maker that has flirted with disaster and success is now the subject of a £20bn takeover bid. David Usborne ponders the motives of its bidders
Oh, what joy there is on Wall Street this Easter. For connoisseurs of the old-fashioned, smash-and-grab takeover bid, the past five years have been dismally lean. But now, voil: Chrysler, the third of Detroit's car-manufacturing giants, is suddenly thrown into play by the cash bid of Kirk Kerkorian and Lee Iacocca. The scope for fun - and money-making - seems almost limitless.

However you look at it, this is a biggy. The target is Chrysler, a corporate behemoth that in the past four years has turned itself around from near collapse to record profitability. The predators, meanwhile, are themselves anything but colourless. Mr Iacocca made himself into a legend by saving the car company from earlier oblivion in the Eighties. Mr Kerkorian is a billionaire investor with a controversial track record of investments in Hollywood and air travel, and a fixation with privacy. Both men are in their seventies but behave like men many years younger.

Then there are the numbers. If this bid is real - and there are doubts - it would be the second-largest in history. Through his Tracinda investment group in Las Vegas (the name is a blending of his daughters' names, Tracy and Linda), Mr Kerkorian is proposing to pay $20bn for Chrysler, at $55 a share. Only one deal has been worth more: the highly acrimonious $25bn buy-out of RJR Nabisco, makers of Marlboro cigarettes, by Kohlberg Kravis Roberts six years ago.

The RJR Nabisco transaction, which became a symbol of the greed-is-good, corporate-raid rampagings of the late Eighties, is suddenly on everybody's mind. Even senior management at Chrysler in Detroit, on hearing the news of the hostile bid, recommended that employees take home a copy of Barbarians at the Gate, the bestseller that told the Nabisco story. The Eighties, some on Wall Street are tempted to feel, are rolling back.

To some extent that is an understandable reaction. Merger and acquisition activity in the US has been steadily on the rise, increasing by 36 per cent in the first quarter of this year alone. And at over $20bn, the Chrysler deal could be worth about $30m to the investment bankers who work on its financing.

There are also elements in the proposed package that smack of the old days. While Messrs Iacocca and Kerkorian would contribute their own Chrysler holdings to the deal, they are proposing syphoning $5bn from Chrysler's war chest of liquid assets, which now stands at $7.7bn, and raising $10.7bn in new debt, which the company would then have to bear.

That there is concern about such a strategy has already been demonstrated by a warning from Standard & Poors, the credit rating agency, that it may downgrade Chrysler's rating if the new debt is piled on. Meanwhile, the sceptics question what Mr Kerkorian's real goal is. Does he actually mean to take Chrysler private? Or is he instead trying to lift the value of his 10 per cent shareholding in the company, either by forcing it to buy back his shares at a special premium - a popular defence strategy for takeover targets in the Eighties, known as greenmailing - or by flushing out someone else to pay a high price for the company in his place.

Speculation is growing that a European manufacturer might emerge either in that role or as a third large investor. Possible candidates include Fiat or Volvo. The Germans may be alone, however, in having the necessary clout. Volkswagen is the name that some analysts favour.

In the increasingly global car industry, where scale remains a key source of competitive advantage, Chrysler is the company that has flirted most often with both disaster and success. Bailed out on the verge of bankruptcy by the US government in 1980, it was revived by the abrasive Mr Iacocca in the Eighties, only to flounder again at the end of the decade. In the past three years, under a new management team, it has revived yet again.

But in world terms, Chrysler remains a second-division player. By size, it ranks third behind General Motors and Ford in the US. It also lags behind the big three Japanese producers Toyota, Nissan and Honda. Once a company with as bad a reputation for quality as British Leyland, it has dragged itself back into profitability with a mixture of new models, improved working practices and collaboration with overseas manufacturers.

Its problem is that while it has recovered strongly in the past three years, it remains not quite big enough to play in the top league. All of the Big Three American car companies have invested heavily in new production facilities and working practices to help them catch up with the superior Japanese methods (something that most European car companies have still to do). The trouble for all three is that the Japanese have also moved on.

Chrysler has the additional problem of being the most "hollow" of the big car-makers, meaning it contracts out more of the elements that go into its cars than any of the other manufacturers. It also has the weakest market presence outside its home market of any of the top six car companies - Japanese and American. That is the logic for believing that it must one day either merge or be taken over.

Mr Kerkorian is not bringing market share or any car industry expertise to the party. There is little industrial synergy between Las Vegas casinos and Detroit car plants: hence, in part, the suspicions about what he is up to in bidding for the company. His expertise is as an investor with a colourful track record.

But nor is he either a carbon copy of the cynical corporate raiders who flourished in the Eighties, funding their bids with Michael Milliken's junk bonds. Mr Kerkorian has stated publicly that he is satisfied with Chrysler's management, headed by Robert Eaton. And Mr Iacocca, who is involved in various ventures from casinos to olive oil spread, is swearing blind that the last thing he wants is to get behind the boss' desk in Motown again.

Mr Kerkorian's interest is narrow and financially driven: he wants to put an end to the curious conundrum afflicting Chrysler. While it has turned itself into the world's most profitable mass manufacturer of cars and light vans, its valuation on the market is at the bottom of the ocean.

Look at the figures and you quickly see why Mr Kerkorian, with his one- tenth holding in the company, is frustrated. Until he announced his bid on Wednesday, Chrysler shares had been trading at close on Tuesday at $39.50. Compared with the company's recent fortunes, that would seem ludicrously low, representing only a multiple of four of its 1994 earnings. Most analysts would suggest that is about one-fifth of the level that most companies would expect their shares to be valued at relative to earnings.

How can such a dazzling success story spawn such miserable returns on the stock market? The answer is simply that investors know a cyclical industry when they see one, and the car industry is cyclical as no other. Automobile shares, one analyst suggested, are viewed much in the way that "terminal cancer" is: they will get you in the end. The markets are anticipating that last year's record profits are not sustainable. Only yesterday, Chrysler confirmed analysts' predictions by announcing first-quarter earnings that were down 36 per cent on the same period last year.