Return of the Raiders

April 14, 1995

Two men in their seventies have brought a whiff of the Eighties to Wall Street in the Nineties. Kirk Kerkorian's startling $22.8 billion hostile takeover bid for Chrysler Corp., with former Chrysler chairman Lee Iacocca along for the ride and a possible return to the company he once rescued, is a triumph of financial chutzpah over sound management. It will be no great loss if this deal fails.

Under the direction of former General Motors executive Robert Eaton, Chrysler has executed a solid turnaround over the last three years to become the nation's most profitable auto company. One of Mr. Eaton's more controversial decisions was to build up a $7.2 billion cash reserve so his corporation would be better prepared to weather a downturn in its highly cyclical industry.

This reportedly angered billionaire Kerkorian, who believed Mr. Eaton's conservative policies were depressing the price of his considerable holding in Chrysler shares. So, to Wall Street's surprise, he made an offer which, if successful, could be the second-largest takeover deal in history. Mr. Kerkorian is believed to be ready to invest $2 billion of his own money plus a piddling $50 million from Mr. Iacocca, seize about $5 billion of Mr. Eaton's rainy-day fund and borrow the rest from big banks that have eased their lending requirements. If this isn't a 1980s-style leveraged buyout, it surely looks, tastes and smells like one.

Ironically, the 37 percent drop in earnings Mr. Eaton reported for the first quarter more or less confirms his judgment that Chrysler will need all the cash backup it can muster to get through a down-cycle that has already begun. As 1994 ended, he knew the make-over to a new minivan, some recall problems and a $1 billion stock buy-back plan (perhaps to assuage Mr. Kerkorian) would bring reserves down from their peak.

No one knows how this latest example of financial high-flying will turn out. It could be a case of "greenmail," despite denials, whereby Mr. Kerkorian will get a payout to withdraw his bid. Or, more substantially, it could anticipate some kind of a merger with a foreign car company eager to cash in on the low dollar. Since there are too many auto producers worldwide, this would make some sense.

All in all, this is a time to tighten the seat belts. Wall Street loves drama and plungers and, above all, the billion-dollar commissions such transactions bring to Manhattan.

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