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.

Have you tried new the Independent Digital Edition apps?
ebookA unique anthology of reporting and analysis of a crucial period of history
Wayne’s estate faces a claim for alleged copyright breaches
John Wayne's heirs duke it out with university over use of the late film star's nickname
Mick Jagger performing at Glastonbury
Life and Style
beautyBelgian fan lands L'Oreal campaign after being spotted at World Cup
Germany's Andre Greipel crosses the finish line to win the sixth stage of the Tour de France cycling race over 194 kilometers (120.5 miles) with start in Arras and finish in Reims, France
tour de franceGerman champion achieves sixth Tour stage win in Reims
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
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

Senior IOS Developer

£40000 - £45000 per annum + competitive: Progressive Recruitment: My client is...

Associate CXL Consultant

£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

Project Manager - ETRM/CTRM

£70000 - £90000 per annum + Job Satisfaction: Harrington Starr: Project Manage...

SAP SD OTC Consultant | 12Months

competitive: Progressive Recruitment: SAP SD OTC Consultant | 12 Months | 500/...

Day In a Page

The true Gaza back-story that the Israelis aren’t telling this week

The true Gaza back-story that the Israelis aren’t telling this week

A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
A History of the First World War in 100 Moments: The German people demand an end to the fighting

A History of the First World War in 100 Moments

The German people demand an end to the fighting
New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

New play reveals what Oscar Wilde said at trials

For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
Can scientists save the world's sea life from

Can scientists save our sea life?

By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

Richard III review

Martin Freeman’s psychotic monarch is big on mockery but wanting in malice
Hollywood targets Asian audiences as US films enjoy record-breaking run at Chinese box office

Hollywood targets Asian audiences

The world's second biggest movie market is fast becoming the Hollywood studios' most crucial
Grindr founder Joel Simkhai: 'I've found love on my dating app - and my mum keeps trying to hook me up!'

Grindr founder Joel Simkhai: 'I've found love on my dating app'

Five years on from its launch and Grindr is the world's most popular dating app for gay men. Its founder Joel Simkhai answers his critics, describes his isolation as a child
Autocorrect has its uses but it can go rogue with embarrassing results - so is it time to ditch it?

Is it time to ditch autocorrect?

Matthew J X Malady persuaded friends to message manually instead, but failed to factor in fat fingers and drunk texting
10 best girls' summer dresses

Frock chick: 10 best girls' summer dresses

Get them ready for the holidays with these cool and pretty options 
Westminster’s dark secret: Adultery, homosexuality, sadomasochism and abuse of children were all seemingly lumped together

Westminster’s dark secret

Adultery, homosexuality, sadomasochism and abuse of children were all seemingly lumped together
A History of the First World War in 100 Moments: Dulce et decorum est - a life cut short for a poet whose work achieved immortality

A History of the First World War in 100 Moments

Dulce et decorum est: a life cut short for a poet whose work achieved immortality
Google tells popular music website to censor album cover art in 'sexually explicit content' ban

Naked censorship?

The strange case of Google, the music website and the nudity take-down requests
Howzat! 8 best cricket bats

Howzat! 8 best cricket bats

As England take on India at Trent Bridge, here is our pick of the high-performing bats to help you up your run-count this summer 
Brazil vs Germany World Cup 2014 comment: David Luiz falls from leader figure to symbol of national humiliation

David Luiz falls from leader figure to symbol of national humiliation

Captain appears to give up as shocking 7-1 World Cup semi-final defeat threatens ramifications in Brazil