Chrysler Cannot Shake Kerkorian
Las Vegas casino mogul and major Chrysler shareholder Kirk Kerkorian has given new meaning to the term “virtual corporation.” You can’t blame Chrysler’s stockholders for wondering which company they own - his or the one run by Chrysler management.
No one expects large shareholders of companies to be wallflowers. Investor Michael Price used his 6 percent stake in Chase Manhattan to bring about the biggest bank merger in U.S. history.
Tele-Communications chief John Malone, a major investor in Ted Turner’s Turner Broadcasting, holds a blocking position in Turner’s proposed merger with Time Warner.
But Kerkorian, having been embarrassed in his failed attempt to take over Chrysler earlier this year, isn’t quitting.
The owner of 13.6 percent of Chrysler stock hired Jerome York, a former Chrysler chief financial officer and most recently the chief financial officer for International Business Machines, to be vice chairman of his investment company, Tracinda.
Tracinda obviously does not need an executive of York’s experience and skill for its own internal operations. His compensation is linked directly to the performance of Chrysler stock, much like Chrysler’s incumbent management. In his bid to take over Chrysler in April, Kerkorian put up former Chrysler Chairman Lee Iacocca as a front man, but York is getting much better reviews from Wall Street.
A few days after York joined Kerkorian, Chrysler management under chief executive officer Robert Eaton announced a second phase of its stock repurchase program - an additional $1 billion worth of stock by the end of 1996 following $706 million repurchased so far this year.
The company may have doubled its share-repurchase anyway, but the timing of the announcement certainly makes it look like Eaton is jumping to Kerkorian’s tune.
It’s unlikely that Tracinda will hire car designers, manufacturing experts or automotive marketing executives. But for the foreseeable future, Chrysler stockholders who thought they were buying a car company enjoying one of the best turnarounds in U.S. corporate history have cast their lot with Tracinda.
There is no way to value Chrysler stock in the short run apart from valuing Tracinda and its ability to attract bank financing for another debt-financed takeover bid for Chrysler that would be paid for by raiding the company’s cash and other assets.
Investors who insist they want to hold Chrysler stock for the long term should ignore the comments of stock analysts and even the recent runup in the stock. Instead, they should be taking their cues from the holders of Chrysler debt securities.
There is no Kerkorian on the ledger’s debt side.
Looking at the news from Tracinda and Chrysler, Standard & Poor’s corporate debt analyst Scott Sprinzen said, “There is nothing good in these developments from the perspective of bond holders. Mr. Kerkorian is positioning himself to do something - another takeover attempt or some effort to extract a higher (cash) distribution to shareholders.”
Having opened the valve of share repurchases under pressure from Kerkorian, it will be hard for Eaton to turn it off, and as a result Chrysler has lost considerable financial flexibility against the ups and downs of the car market, Sprinzen believes.
Marvin Behm who follows Chrysler debt for Duff & Phelps Credit Rating, said the latest share-repurchase announcement does not signal a change in the company’s financial structure, even though Chrysler’s cash position has fallen by $1 billion from the $7.9 billion level at the end of 1994 and is below the company’s target for a cash cushion.
Tracking Chrysler’s debt securities, such as the Auburn Hills Trust Certificates due in 2020, indicates that debt investors did not panic at the latest news.
But “I have to admit that there’s a great potential that Kerkorian and Tracinda will do something to upset the apple cart,” said Behm.