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.

Life and Style

Sales of the tablet are set to fall again, say analysts

A Brazilian wandering spider
natureIt's worth knowing for next time one appears in your bananas
Life and Style

I Am Bread could actually be a challenging and nuanced title

Nigel Farage has backed DJ Mike Read's new Ukip song
Have you tried new the Independent Digital Edition apps?
ebooksAn unforgettable anthology of contemporary reportage
Life and Style

Company decides to go for simply scary after criticising other sites for 'creepy and targeted' advertising

The Banksy image in Folkestone before it was vandalised
Mario Balotelli pictured in the win over QPR
footballInternet reacts to miss shocker for Liverpool striker

Footage shot by a passerby shows moment an ill man was carried out of his burning home

Sol Campbell near his home in Chelsea
Kimi the fox cub
newsBurberry under fire from animal rights group - and their star, Kimi
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

C# Developer - West Sussex - permanent - £40k - £50k

£40000 - £50000 Per Annum + excellent benefits package: Clearwater People Solu...

SQL Report Analyst (SSRS, CA, SQL 2012)

£30000 - £38500 Per Annum + 25 days holiday, pension, subsidised restaurant: C...

Project Manager (App development, SAP, interfacing)

£50000 - £60000 Per Annum + excellent company benefits: Clearwater People Solu...

IT Project Manager (technical, applications, infrastructure)

£55000 - £60000 Per Annum + benefits: Clearwater People Solutions Ltd: IT Proj...

Day In a Page

Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

'They poured water on, then electrified me...'

If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
James Wharton: The former Guard now fighting discrimination against gay soldiers

The former Guard now fighting discrimination against gay soldiers

Life after the Army has brought new battles for the LGBT activist James Wharton
Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

Panic over Ebola threatens to infect the midterms

Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
Premier League coaches join the RSC to swap the tricks of their trades

Darling, you were fabulous! But offside...

Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

How to dress with authority

Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

New book on Ian Curtis sheds fresh light on the life of the late singer

'Joy Division were making art... Ian was for real' says author Jon Savage
Sean Harris: A rare interview with British acting's secret weapon

Sean Harris: A rare interview with British acting's secret weapon

The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

Tim Minchin interview

For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
Boris Johnson's boozing won't win the puritan vote

Boris's boozing won't win the puritan vote

Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

Tim Wheeler: Alzheimer's, memories and my dad

Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album
Hugh Bonneville & Peter James: 'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'

How We Met: Hugh Bonneville & Peter James

'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'
Bill Granger recipes: Our chef's heavenly crab dishes don't need hours of preparation

Bill Granger's heavenly crab recipes

Scared off by the strain of shelling a crab? Let a fishmonger do the hard work so you can focus on getting the flavours right
Radamel Falcao: How faith and love drive the Colombian to glory

Radamel Falcao: How faith and love drive the Colombian to glory

After a remarkable conversion from reckless defender to prolific striker, Monaco's ace says he wants to make his loan deal at Old Trafford permanent
Terry Venables: Premier League managers must not be allowed to dictate who plays and who does not play for England

Terry Venables column

Premier League managers must not be allowed to dictate who plays and who does not play for England
The Inside Word: Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past

Michael Calvin's Inside Word

Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past