The war of words raging between Kirk Kerkorian and Chrysler Corp finally came to a conclusion in February – at least for the foreseeable future. Since Tracinda, Kerkorian’s holding company, started pressuring Chrysler over its low stock price in November 1994, the confrontation has taken place on all sorts of fronts.
The litany includes a failed bid for Chrysler by Kerkorian last April, a tender offer in June, hard lobbying over stock buy-backs and dividends, a threatened proxy fight, and a governance review by Chrysler.
Kerkorian, who pulled out the stops to squeeze shareholder value and representation from Chrysler, gained considerable ground. ‘This marks the beginning of a new era in shareholder rights,’ avers Ralph Whitworth, Tracinda’s governance adviser, a long-term shareholder rights advocate and former lieutenant of legendary corporate raider T Boone Pickens. ‘It was unheard of for a large, long-term shareholder to gain a board seat at a Fortune 10 company. The process followed by both sides was unprecedented. In the past, only a company in dire straits could be swayed. On the basis that Chrysler was not stumbling but performing well, we came up with a realistic and logical governance platform. And ultimately Chrysler realised our demands were not unreasonable.’
Chrysler’s old attitude towards shareholders was evident in chairman Robert Eaton’s statement at last year’s annual meeting: ‘Obviously we don’t choose who our shareholders are,’ he said.
According to one IR practitioner, that was a slap in the face for Kerkorian and all the other shareholders. The insult was compounded by Chrysler’s approach to Tracinda in its dark days to buy up equity.
Now, with its recent round of shareholder meetings and concessions to Tracinda, Chrysler has validated the notion that a big long-term shareholder deserves board representation. But that still begs the question Whitworth has been fielding since the fight’s recent resolution: who actually won the day?
Whitworth’s answer is that both sides made significant headway. After performing quasi-scientific calculations on demands and concessions, he calculates that Tracinda and Chrysler both achieved 75 per cent of what they wanted. ‘Our number one desire was board representation, and we got it,’ says Whitworth. ‘Chrysler wanted peace and an assurance of Tracinda’s shareholder role over the next several years. And to a large extent they got it.’
Others, like Harvey J Goldschmid, law professor at Columbia University and expert on corporate governance, claim that Chrysler management came out ahead. ‘Kerkorian got just enough concessions to feel comfortable in accepting the compromise,’ Goldschmid surmises. ‘He backed off in the end because Chrysler convinced investors it was a well managed company. That means shareholders are the real winners in the end. The changes Kerkorian provoked certainly don’t do any harm, and may have opened the minds of management.’
The first stirring of dissent by Kerkorian was hardly unexpected. After all, Chrysler rocketed from near-death to become one of the world’s most profitable car companies in just three years. ‘Tons of cash’ were starting to mount up in 1994, according to one fund manager, and Chrysler was running out of places to put it. But the stock price was still languishing in the mid-40s range. By the end of third quarter 1994, Chrysler had $6.6 bn in cash on hand – just short of Eaton’s $7.5 bn target. Many investors wanted a better share of the spoils.
Many saw Kerkorian as self-serving when he fired the opening salvo in the fall of 1994, demanding a bigger cut of Chrysler’s loot for shareholders. As the company’s largest stakeholder, Kerkorian’s wish-list of bigger dividends, stock buy-backs and other titbits would all have served to enrich him.
But Kerkorian was not alone; other shareholders agreed with his basic position. They believed that Chrysler’s riches gave every indication of growing further, and these predictions have since been borne out.
The next move came in April 1995, although the nature of events is still foggy. Kerkorian and former Chrysler chairman Lee Iacocca are widely deemed to have bungled a $22.8 bn takeover attempt for Chrysler. ‘It was a bad gap in understanding,’ says Michael Claes, executive vice president at Burson-Marsteller, the firm handling financial communications for Tracinda. ‘Tracinda never intended a hostile offer. They thought Chrysler would look positively on a proposed purchase. For its part, Chrysler thought it had already sent a clear No thank you message.’
Claes emphasises that Kerkorian has never voted against Chrysler management. Over his five years as a major shareowner, he has shown a consistent pattern of support and confidence in management – always a buyer, never a seller. ‘Kerkorian has never been anti-management,’ Claes states. ‘No-one on any side thought Chrysler’s $39 stock price last spring was properly valued.’
The question was and is about the best route to unlock upside potential. Many analysts are pegging the real value of Chrysler stock around the $80 mark – against the current $57.50. ‘1980s pressure tactics do not work any more,’ says John Wilcox, chairman of Georgeson, Chrysler’s IR consultant and proxy solicitor. ‘Tracinda came on aggressively, just like a raider of ten years ago. Back then, it would have stimulated interest from arbitrageurs and speculators, working to change the control of the company. Either the raider or a third party would have acquired the company, or there would have been a greenmail buy-out.’
Wilcox, a veteran of many a proxy fight, says a key reason Tracinda did not succeed was that Chrysler was a frontrunner, not a lame horse looking at poor performance. Besides, the fundamental differences in 1990s shareholder demography and IR mean that the old raider methods no longer work. ‘The past seven years have seen the majority of share ownership shift to institutions,’ Wilcox notes. ‘These investors are in for the long-term, not for speculation. Tracinda’s proposals just didn’t appeal to them.’
With no prospect of a friendly takeover, Kerkorian turned to the chores of a long-term stakeholder and began plotting his campaign solely on the basis of cash management and corporate governance.
In September, he hired Jerome York, former CFO of Chrysler, to be major domo and pointman of the renewed effort and York called in Whitworth. Chrysler started making moves in the right direction, with a $1 bn buy-back as well as a dividend increase. The dividend was upped again in December to bring the total rise to some 40 per cent.
But Kerkorian still wanted action and Whitworth was brought on board to handle the task. ‘I went to meet Kerkorian only knowing ‘the raider’ portrayed by the national media,’ says Whitworth. ‘He turned out to be completely different from that perception. He was not in it to make a quick buck. Even the April buy-out attempt was not made for short-term gain. It would have been completed as a long-term work-out with Kerkorian as a major equity investor. Throughout his history with MGM and United Artists, Kerkorian has never shown a desire for short-term profits. It is just not part of his game plan,’ says Whitworth.
Whitworth Associates was hired on to the team for $1.5 mn, but that grew to $5 mn by the end of the story. The consultants’ first job was to go to work on the governance proposals to be sent to Chrysler. ‘We thought long and hard to find realistic terms,’ recalls Whitworth. ‘Chrysler was doing relatively well and was not a prospect for a major corporate shake-up. Still, Kerkorian wanted and deserved proper representation. That was the basis of our programme.’
A letter was quickly dispatched to Chrysler management in October, followed by a preliminary proxy statement filed with the SEC on November 22. DF King was hired as the proxy solicitor, and Whitworth invited David Batchelder to join the Tracinda team. Batchelder is an old hand in the corporate governance game. He also worked as an executive with T Boone Pickens in the 1980s; and with Whitworth he co-manages the Relational Investors Fund, an investment pool largely funded by Calpers. Tracinda also uses New York-based PR agency Sard Verbinnen.
In the ensuing months, while both sides were making the rounds of shareholders to drum up support, few observers expected a positive response to Tracinda’s foray from Chrysler. Chairman Eaton publicly accused Tracinda of trying to win ‘creeping control’ and of becoming the dominant force in Chrysler without paying any premium. A greatly displeased Eaton aggressively addressed Tracinda’s claim to be acting in the interests of all shareholders, maintaining that the whole saga was a major distraction for Chrysler’s senior executives. He claimed that Kerkorian did nothing to enhance shareholder value overall and had been ‘a big negative for the company.’
‘Tracinda was going up against a brick wall,’ says Wilcox. ‘Eaton was highly thought of by the financial and business community, and the company had a solid rapport with its investor base. Chrysler had a clear and well known strategy. In the past, IR was merely a branch of PR at many companies: now companies understand that producing and communicating investment return is as important as producing a solid bottom-line.’
In fact, when all was said and done, Chrysler’s corporate governance review surpassed Tracinda’s expectations. The company arranged visits to some 36 shareholders, representing around 46 per cent of Chrysler’s outstanding shares. Each Chrysler delegation included a senior member of the management team and an outside board member.
‘It was a great approach by the company,’ Whitworth concedes. ‘At first Tracinda thought it was a delaying tactic, but as the process unfolded we realised it was a legitimate effort. In the end, Chrysler’s review is a model for resolving differences between major shareholders and companies.’
While Chrysler’s governance review was under way, York and his Tracinda team were also making the rounds of the major shareholders. Whitworth, who was at some of the investor meetings, says that the response was positive overall: ‘Most major shareholders considered our demands to be reasonable. It was becoming clear to shareholders, and had been clear to Tracinda from the start, that our modest proposals were not worth taking to a proxy fight.’
Presumably Chrysler faced similar feedback, given the recent deal with Tracinda. ‘But who is responsible for the benefits to shareholders?’ wonders Wilcox. ‘The only answer to that question lies in the workings of the stock market in valuing the company. It’s impossible to calculate how much of the 30 per cent gain in stock price over the last year is due to the accomplishments of Chrysler’s management, and how much due to the activities of Tracinda.’
‘The events of the last year at Chrysler show companies are now responding to shareholders differently from the way they did several years ago,’ says Jamie Heard, head of Institutional Shareholder Services. Heard contrasts GM and Roger Smith’s rude response to Calpers’ governance proposals in the 1980s with the interaction between Chrysler and Tracinda. Chrysler’s management was smart enough to know that institutional investors expected a response to the issues raised by Kerkorian: ‘In the end, the company did a good job of understanding shareholders and responding without compromising strategy,’ says Heard.
‘I strongly believe in constructive tension in the boardroom in the business environment of the 1990s,’ adds Goldschmid. ‘What managements and boards sometimes forget is that stockholders usually have exactly the right instincts when it comes to running a company. They are an important part of capital formation, and their goal is to get maximum productivity and efficiency. One way or another they receive whatever is left after everyone else has been paid. That makes them the healthiest of constituencies by any standard of public policy.’
The real moral of the Tracinda-Chrysler story may be that corporate governance and proxy fights are taking a different turn. Individuals like Kerkorian understand the new dynamic and are working within the new context to make their point. America’s corporations have learned important lessons, too; that they can no longer ignore the demands of major shareholders; and that compromise is preferable to confrontation. Some managements even admit that such compromise benefits the whole corporate structure, not just shareholders.
So much for the generalities. In the specific case of Chrysler and Tracinda, the truce is uneasy and how long it will hold is anybody’s guess. Given the law of the Wall Street jungle, if Chrysler fails to perform in the year’s ahead, and lets its guard down in terms of its new compromise with Tracinda, no one would expect Kerkorian to stand by. Once a raider always a raider.
What Kerkorian Wanted
- A committee of outside directors to review Chrysler’s cash needs. Chrysler wants to amass $7.5 bn in cash; Tracinda reckons it needs only $5-5.5 bn for its purposes.
- More stock buy-backs.
- A Chrysler board seat for Tracinda executive Jerome York, former CFO of the car maker, and two new board seats with candidates mutually chosen by Tracinda and Chrysler.
- A change to Chrysler’s poison pill provision to allow Kerkorian to acquire up to 20 per cent of the company (instead of 15 per cent).
- An anti-greenmail provision prohibiting the company from paying a premium to one shareholder without offering the same to all shareholders.
What Kerkorian Got
- A 90-day Chrysler board review of governance policies, business strategy and financial performance. Chrysler kept its $7.5 bn cash reserve target but continues to pursue the sale of its non-automotive assets to fund buy-backs.
- A doubling of Chrysler’s 1996 buy-backs to $2 bn; plans for $1 bn in 1997.
- A board seat for James Aljian, Tracinda executive since 1965, and a provision for Kerkorian to replace Aljian as a Chrysler director in the future. John Neff, former managing partner of Wellington Management, Chrysler’s third largest shareholder after Kerkorian and Fidelity, was named to Chrysler’s board.
- Modified poison pill with a Qualifying Offer exception.
- An anti-greenmail bye-law.
What Chrysler Got
A five-year standstill for Kerkorian, during which time he will refrain from increasing his 14.1 per cent holding in Chrysler’s stock. Tracinda will sell shares as necessary to avoid exceeding the limit; it will also vote its shares proportionally with other shareholders; and it will not solicit proxies or make any other attempts to change control of Chrysler or its board of directors.
Settlement of Lee Iacocca’s lawsuit against Chrysler over unexercised options for $21 mn, with the remaining $32 mn compensation paid by Kerkorian.
Termination of Kerkorian’s pacts with corporate governance adviser Ralph Whitworth and proxy solicitor DF King, but he keeps PR firms, Sard Verbinnen and Burson-Marsteller.
