Tracinda Corporation, a private investment coropration owned by Kirk Kerkorian, has submitted a US$4.5bn bid for Chrysler to DaimlerChrysler.
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Analysts were surprised by the move and some speculated that the sum offered by Tracinda may be too small.
The deal would be subject to an agreement with the UAW and there is an offer to make the UAW an equity partner in Chrysler in exchange to finding a ‘solution to ever-rising healthcare costs’. Thus far, the UAW has been hostile to the idea of Chrysler being taken over by a private equity company.
DaimlerChrysler is said to have a further three offers for Chrysler to examine (two from private equity groups – Blackstone and Cerebus – and a further offer from Magna).
DaimlerChrysler yesterday confirmed that it was in talks with potential partners over Chrysler, but made no other comments.
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By GlobalDataKerkorian is assisted in this deal by his trusted aide and Tracinda employee Jerome York.
Kerkorian previously tried to take over Chrysler in 1995 and was assisted in his attempt by former CEO Lee Iacocca and CFO Jerome York. The deal fell apart due to inability of securing finances.
Tracinda was the main shareholder in Chrysler when it merged with DaimlerBenz in 1998.
Kerkorian, who had opposed the merger, then tried to sue the firm in 2000, claiming that DaimlerBenz organised the deal to buy Chrysler in such a way that meant he lost billions of dollars. The case was rejected.
DaimlerChrysler announced in February that it would consider offers for the loss-making Chrysler unit, which is also facing a restructuring plan to return it to profitability.
The text of an open letter from Jerome York to DaimlerChrysler CEO Dieter Zetsche reads as follows:
Dear Dr. Zetsche:
I had the chance to meet you briefly at Gary Valade’s retirement party in early 2004, and enjoyed our chat at the time, on Toyota pricing as I recall. Of course the several hundred in attendance at that event were in high spirits, as the impact of Chrysler’s early 2000’s turn around plan was beginning to exhibit remarkable results.
But of course this was three years ago, when gasoline prices were still below $2.00 per gallon in the US, and before three more years of rampant healthcare inflation had taken place.
As Tracinda’s letter to DaimlerChrysler’s Supervisory Board suggests, we have been following Chrysler closely and studying publicly available materials. And having been a major shareholder for over a decade we are very familiar with both Chrysler and the automotive industry, and have come to believe, all factors considered, that a private ownership approach is in the best interests of all Chrysler constituencies.
The right (meaning exceptionally patient) private ownership can do things that are difficult for both public companies and the wrong (meaning not so patient) private ownership, specifically:
1. Take a very long term approach to solving Chrysler’s problems without worrying about “EPS results” for the initial five, six or seven year period it will likely take to build Chrysler into a robust and lasting, stand-alone entity.
2. Offer a substantial portion of equity in the company to the UAW as part of finding a solution to ever-rising healthcare costs, which not only are unaffordable by corporations, but over time will likely prove to be unaffordable by governmental entities as well.
Regarding the first point, the necessary investments will have to be made in product development and manufacturing to [a] get Chrysler on a product renewal cycle that is fully competitive with the Asian producers in terms of newness, [b] shift the product mix towards “greener” segments, and [c] get product quality to the levels necessary to eliminate this as a bias in consumers minds towards purchasing Asian products.
The returns will not come quickly. Investors that feel the need to show “mark to market” results in their funds in relatively short time frames (just a few years) will not be willing to invest as necessary over an unusually lengthy period of time to achieve the necessary end results.
Long term, patient investing has been Tracinda’s approach. Aside from its decade-plus investment in Chrysler, it was the controlling shareholder of Metro-Goldwyn-Mayer for eight years from 1996 to 2004, and built the company through film library acquisitions into a public company worth two and a half times its acquisition cost in 1996. And more notably, Tracinda has been the controlling shareholder of MGM Mirage (originally MGM Grand) for twenty years—having built it into a public company with a market capitalization of nearly $21 billion today.
That is what we believe all the Chrysler constituencies need. Not a “quick fix,” that may show good results three or so years from now, only to have the company possibly slip into another crisis situation. But a lasting fix that builds on the fundamental requirements in the automotive industry of product newness and quality, and in the process provides returns not only to the investors, but to the employees as well through their ownership stake.
Accordingly, I hope that you and the Supervisory Board will carefully consider the proposal made today by Tracinda Corporation.
Sincerely,
Jerome B. York
