December 05, 2003
Kerkorian Trial
Posted by Gordon Smith

If you haven't been following Kirk Kerkorian's lawsuit against DaimlerChrysler, here is a little primer. I have been following Kerkorian's interactions with Chrysler since the mid-1990s, so this latest chapter seems like simply another twist in the strained relationship that is Kerkorian and Chryster.

Kerkorian burst on the Chrysler stage in December 1990, when it was announced that he owned 9.8% of Chrysler's outstanding shares. He was then Chrysler's largest shareholder, and he claimed to be acquiring shares for investment purposes only because of the high regard he held for Chrysler's then CEO and Chairman, Lee Iacocca.

Despite Kerkorian's professed admiration, Iacocca immediately called a special meeting of Chrysler's Board, which reacted to the news by strengthening Chrysler's poison pill, reducing the trigger from 20% to 10%. Chrysler officials maintained that the move was simply precautionary, while Kerkorian's spokesman called it an overreaction.

Chrysler's performance during this time was poor as the company weathered the economic downturn of the early 1990's. In 1992 Iacocca's relationship with Kerkorian blossomed as Iacocca stepped down from his post as Chrysler's CEO and Chairman. Chrysler appointed Robert J. Eaton, a former GM executive, as his successor. Before retiring, Iacocca complained privately that he was being treated shabbily by the board by being forced to move on too quickly. Kerkorian responded by issuing a letter to Chrysler's board threatening to seek board representation to rectify concerns over "Mr. Iacocca's continued leadership role in the company." However, after a meeting with Iacocca, Eaton, and another board member, Kerkorian backed down, but not before ensuring that Iacocca would represent his interest on the board.

In November 1994, Kerkorian again began to feel dissatisfied with Chrysler's stock performance. This time he pointed the finger at Chrysler's cash stockpile. In a filing with the SEC and a letter to Chrysler's board, Kerkorian detailed his plans for increasing the value of his investment, which included instituting a stock repurchase program, effecting a 2-for-1 stock split, and raising the quarterly dividend. He also declared his intention to increase his stake in Chrysler to 15%. Accordingly, he asked Chrysler's board to redeem its poison pill takeover defense, which had a 10% threshold. This move focused attention on the cash stockpile Chrysler was amassing, which, at the time of Kerkorian's announcement, was approximately $6.6 billion. Chrysler was intent on saving at least $7.5 billion to continue its aggressive product development through the next economic downturn. Many of Chrysler's large investors supported Kerkorian's push for a stock repurchase and an increased dividend.

The Chrysler board met on December 1, 1994 to respond to Kerkorian's proposals. They appeased Kerkorian by raising its quarterly dividend 60% from 25 cents to 40 cents, by announcing a $1 billion stock buyback program, and by raising its poison pill threshold from 10% to 15%. Chrysler was able to approve these measures and still remain on track to reach its $7.5 billion cash goal by the end of 1995. The move was pleasing overall to Kerkorian, although he continued to hold out hope for a stock split. He subsequently purchased an additional 4 million shares raising his total share in the company to 10.16%. Despite the actions taken by the board, the stock price languished, dropping to a low of $38.25 in late March, 1995.

On April 12, 1995, Kerkorian and Iacocca tendered an unsolicited bid for Chrysler at $55 a share. Kerkorian's plan amounted to a leveraged buyout with $12 - $13 billion in loans, $2 billion from Kerkorian's continued equity holdings, another $3 billion from additional equity partners, and $5.5 billion from Chrysler's cash. The $55 a share offering price represented a 40% premium over market price.

Reaction to the offer was mostly negative. Auto workers and management spoke out against Kerkorian's proposal to use up the majority of Chrysler's cash cushion; however, a few institutional investors appeared to embrace the offer. Whatever support Kerkorian may have had initially was withdrawn when it was discovered that he did not have financing arranged prior to launching the bid. He was unable to gain financial backing from banks who do business with Chrysler, because they were concerned, under pressure from Chrysler, about the proposed use of Chrysler's cash.

Kerkorian then shifted his focus to mounting a possible proxy fight. He sent a letter to Robert Eaton proposing that the board let the shareholders vote on his offer, or, alternatively, let them vote on the idea of raising the annual dividend to $5 per share. Kerkorian purchased an additional 1.9 million shares in the open market at $50 - $52, pushing his share of the company to 14.1%.

After these transactions, both sides attempted to curry favor with investors in preparation for an increasingly likely proxy fight. On September 5, 1995, Kerkorian hired former Chrysler CFO and board member Jerome B. York to serve as Tracinda Corporation's vice-chairman. The move gave Kerkorian a legitimate candidate through which he could pursue board representation. Along with his increased stake in the company, the hiring of York also re-established Kerkorian's credibility. Chrysler countered by doubling the stock repurchase program to $2 billion and sending Eaton to meet with Chrysler's big investors. Chrysler even took out newspaper and magazine ads defending the company's record. York countered Chrysler's posturing by focusing attention on Chrysler's vehicle quality problems.

On October 25, 1995, in a letter to Eaton, York demanded a seat on Chrysler's board. York's demand also included a proposal to add two board seats to be filled by persons mutually agreed upon. The letter also asked Chrysler to appoint a committee of outside directors to examine Chrysler's cash management policy, adopt an anti-greenmail bylaw, require shareholder approval of any issuance of blank check preferred stock, and to raise the poison pill threshold from 15% to 20%. Chrysler's board met the following week and responded by commissioning a 90-day review of its corporate governance policies and board membership.

On February 8, 1996, Kerkorian signed a 5-year standstill agreement which prohibited him from purchasing Chrysler shares in exchange for a board seat, filled by Kerkorian aide, James D. Aljian, an increase in the stock repurchase program to $3 billion, an increased dividend, and an end to the feud between Iacocca and Chrysler involving his stock options. The agreement appears to have been motivated by findings made during the 90-day review. York said that after visiting other shareholders, it became clear that a settlement is something investors wanted. As agreed, Chrysler boosted the quarterly dividend again on May 16, 1996 to 70-cents. In addition, Chrysler declared a 2-for-1 stock split.

Fast forward to 1998. Daimler-Benz and Chrysler announced a "merger of equals." Kerkorian voted his shares in favor of the merger, as did most of Chrysler's shareholders. Within a short time after the combination, however, it became apparent that this was not the "merger of equals" that Robert Eaton had demanded, but a takeover by Daimler. Indeed, in 2000 the Daimler-Chrysler CEO, Joergen Schrempp was quoted by the Financial Times as saying that he never meant it to be a merger of equals and that they described the deal in that way "for psychological reasons." He referred to Chrysler as a "division" of Daimler and said that control by German managers "was always the structure I wanted."

This revelation led the lawsuit by Kerkorian. He is claiming that Daimler had misrepresented the deal. Kerkorian is seeking more than $1 billion in damages. Interestingly, his claim is that he trusted Daimler to consummate a merger of equals and only "browsed" the merger documents. In my view, Kerkorian was a useful prod at Chrysler, but he doesn't have a prayer of winning this lawsuit. His case seems to rest heavily on Schrempp's interview, but that is pretty week evidence of fraud.

Contracts | Bookmark

TrackBacks (1)

TrackBack URL for this entry:

Links to weblogs that reference Kerkorian Trial:

ยป Kirk Kerkorian's Suit from ...
"A couple of days ago, I blogged my disagreement with Holman Jenkin's analysis of Krik Kerkorian's su ..." [more] (Tracked on December 6, 2003 @ 9:40)
Recent Comments
Popular Threads
Search The Glom
The Glom on Twitter
Archives by Topic
Archives by Date
January 2019
Sun Mon Tue Wed Thu Fri Sat
    1 2 3 4 5
6 7 8 9 10 11 12
13 14 15 16 17 18 19
20 21 22 23 24 25 26
27 28 29 30 31    
Miscellaneous Links