The emergence of Kirk Kerkorian, 77, into public view is the dealmaking equivalent of the sun rising in the west. Kerkorian, who owns 10 percent of Chrysler, is notoriously publicity-shy. lie usually does subtle, complicated deals in which there’s more than meets the eye. Not this time. There’s less-than meets the eve in the $22.8 billion offer that he and Iacocca made for Chrysler. It contains more escape hatches than a fleet of submarines. Rather than lining up investors and lenders and trying to take over Chrysler quickly, the typical route followed by raiders, Kerkorian hadn’t lined up penny one. He seemed more an eager seller of Chrysler than a buyer, his spokesman’s denials notwithstanding. Kerkorian himself was unavailable.
The beauty of the offer, from Kerkorian’s point of view, is that it has no risk. just making the offer put Chrysler in play. It drove up the price of his 36 million Chrysler shares by 8300 million or so, adding to a personal for-tune that Forbes magazine estimates at $2.5 billion. He may actually get to buy Chrysler on his terms, which don’t involve him risking anything other than the Chrysler stock he already owns. If another buyer swoops down and buys the company, which Kerkorian isn’t exactly discouraging, he makes a big profit. “We’re open to anything,” said Alex Yemenidjian, Kerkoriain’s spokesman. And if Chrysler pays a big dividend or takes some other dramatic financial step to placate shareholders and remain independent, Kerkorian wins, too. If none of these things happens, Kerkorian isn’t any worse off than he was.
But this game carries enormous risks for Chrysler and the company’s 125,000 employees, about half of whom are U.S. blue-collar workers. That’s because Kerkorian wants to use $5.5 billion of Chrysler’s cash to help finance the buyout, and would also pile more than $12 billion of debt onto the company. Chrysler had near-death experiences in the 1960s, ’70s and ’80s, and has amassed a $7.6 billion hoard to see it through the next auto slump. Kerkoriain’s spokesman insisted the deal wouldn’t put Chrysler at risk because its remaining cash and bank credit will help it deal with any problem. But subtracting $5.5 billion of cash and adding $12.5 billion or so of debt has to make Chrysler far more vulnerable to a downturn. The dip may be starting. The day after Kerkorian’s offer, Chrysler said its first-quarter 1995 profit was down by 37 percent.
Kerkorian began buying Chrysler shares in 1990, when many analysts thought the company might go under, and added to the position in several stages. But instead of failing, Chrysler hit it big. Its products were hot, and the company, barely profitable in 1992, made a record $3.7 billion last year. Kerkorian saw value other investors didn’t see. Kerkorian’s total investment: $676 million. His paper profit before putting the company into play: around $750 million. His paper profit at $55 a share: $1.3 billion.
Kerkorian’s insatiable money drive-how many hungry 77-yearold billionaires do you know?-may have something to do with his childhood. The son of an immigrant fruit dealer, Kerkorian grew up poor in Fresno and Los Angeles. His family moved frequently because it couldn’t make the rent, he once recalled. He was 16 by the time he entered eighth grade, where his formal schooling ended. He had thought of being a professional boxer, but ended up working construction, where he met a coworker who was taking flying lessons. Kerkorian was bitten by the flying bug himself. In 1947, he spent about $12,000 to buy a used C-47 airplane and started an airline. He sold the airline in 1962, bought it back in 1964 for less than the sale price, took it public, then peddled the whole company again in 1968 and pocketed more than $100 million. He parlayed that money into hotels, casinos and movies, buying and selling companies in incredibly convoluted deals.
Some of his businesses did terribly - witness Metro Goldwyn Mayer, the movie studio that shriveled under his ownership but Kerkorian made a lot of money. He got Ted Turner to overpay for MGM’s film library, and later sold the remnants of the company for $1.3 billion to Giancarlo Parretti, who defaulted on his loans almost before his purchase check cleared. Credit Lyonnais, the French bank that financed the deal, is suing Kerkorian for misrepresenting the studio’s financial condition. He has denied guilt.
Kerkorian is strictly a financial player. He makes his investments, installs management and goes about his life, which seems to consist largely of dealmaking and leisure activities. Kerkorian has been sparring with Chrysler management for months, complaining that the company’s cash reserves are too high. He has grown increasingly agitated as Chrysler stock, in the 50s in January, dropped to the 30s. He was doubtless spurred on by his buddy Iacocca, who is said in Detroit to feel disrespected because of the way he was treated in his final years at Chrysler (page 49). If so, this is sweet revenge, driving Chrysler nuts with little or no risk for Iacocca and Kerkorian. Kerkorian is proposing a $22.8 billion buyout without putting up a penny of his own money. How? Watch. Kerkorian would swap his 36 million shares, which at $55 a share would be valued at $1.98 billion, for a controlling stake in new, private Chrysler. Iacocca would swap about a million of the Chrysler shares he owns for $50 million of the new Chrysler stock. About $3 billion more would come from investors yet to be identified, making for $5 billion of stockholder investment. Then there’s the $5.5 billion from Chrysler’s own cash. And Kerkorian’s spokesman, Alex Yemenidjian, said the company would borrow $10.7 billion.
Oops. Those numbers, unveiled in a news conference last week and repeated numerous times by Yemenidjian, add up to only $21.2 billion. That’s not the $22.8 billion it would take to buy all of Chrysler’s 415 million shares at $55 each. During a telephone inter-view, Yemenidjian conceded he’d made a mistake. Rather than borrowing $10.7 billion, he said, the buyout would really borrow something more than $12 billion. This kind of math error makes you wonder how serious this offer is. Or whether it was drawn up by some guys kicking back with a few brews and Chrysler’s financial reports, making notes on the back of an envelope. Yemenidjian readily admits that Kerkorian hadn’t lined up any other investors or lenders before making his announcement. “We didn’t want there to be leaks,” Yemenidjian said.
This deal depends on numerous things, including the willingness of lenders to fork over more than $12 billion to finance the buyout of a cyclical company. if Chrysler has two or three 1994s, it can carry the debt, write the $3 billion to $4 billion of checks it takes each year to keep its facilities up to date and develop new vehicles, and still have plenty left over. But if 1992 comes back, look out below. We could be heading for a Wall Street versus Main Street clash: Kerkorian and Chrysler’s other big shareholders, who want a payoff today, against Chrysler’s managers, workers, suppliers and communities, who want to make sure the company is still around tomorrow. One thing is certain. Even though Chrysler is likely to come out of this worse off, Kerkorian will come out better off. Ah, the joys of being a 77-year-old billionaire in whom the money lust still runs strong.
