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Chrysler Bid Illustrates Takeover Pattern

Thu., April 13, 1995

The monumental size of Wednesday’s potentially hostile bid for Chrysler Corp. raises questions about whether corporate merger activity again is becoming superheated, as in the late 1980s, when waves of hostile and friendly bids loaded up big companies with so much debt that many later collapsed into bankruptcy.

Last year, total announced domestic merger activity hit a record $340 billion, surpassing a record set in 1988. Experts said the trend continued in the first quarter of 1995.

But investment bankers, merger lawyers and speculators in takeover stocks - all of whom benefit from the upswing in merger activity - insisted Wednesday there is no cause yet for alarm. Rather than hordes of barbarians, they see two grumpy old men at Chryslers’ gates, Kirk Kerkorian, 77, and Lee Iacocca, 70, who may want the company mainly for personal reasons - if Kerkorian is not simply trying to cash in on his holdings by putting the company “in play.”

These merger specialists contend that, unlike the 1980s, the great majority of recent deals - including a marked upswing in hostile bids - are strategic ones by companies seeking logical business expansions, not speculative plays by professional corporate raiders. For example, they cite the agreement Monday by Clark Equipment Co. to be acquired by Ingersoll-Rand for $1.5 billion following a hostile bid. Both companies make machinery.

“These are mostly corporate, strategic deals,” said Robert Profusek, a partner specializing in corporate takeovers at law firm Jones Day Reavis & Pogue. “We’re not seeing a lot of raider-type participation.”

They also note that the type of ferocious bidding wars that erupted in the late ‘80s when companies were put in play have been extremely rare recently. One reason, Profusek says, is that it has become much harder to borrow money for highly leveraged transactions. “The public markets learned a lesson and the banks learned a lesson” from the 1980s, he said.

Although Wall Street Wednesday had a lot of questions about the Chrysler bid, including how it would be financed, experts said the $22.8 billion deal does not appear excessive. Charles Ronson, a money manager at Balestra Capital in New York, said that many of the 1980s leveraged buyouts involved taking on so much debt that companies had no choice but to sell off subsidiaries just to be able to meet interest payments.

“The deals they’re doing right now basically work without having to sell off 50 percent to 90 percent of the acquired company,” Ronson said.

He said Chrysler, which has a relatively strong balance sheet and good cash flow, could support the stated purchase price. “It’s eminently doable,” he said.

But even optimistic merger specialists acknowledged some reasons for caution.

For one thing, the recent deals have been done as the U.S. stock markets hit a succession of record highs. The purchasers thus are paying a substantial premium over record high stock prices.

Although the acquisitions are strategic, many companies may be making bids now just because lots of other companies are doing so.

Profusek said: “There is definitely a herd-like mentality out there.”

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