The mantra fell from favor when the buyout binge of the 1980s turned into the bankruptcy binge of the 1990s. But we’re hearing that old song again from Kirk Kerkorian, as he puts Chrysler Corp. into play, and from mutual fund manager Michael Price, who is pressuring Chase Manhattan Corp., the giant bank company in which his Mutual Series funds recently purchased a whopping 6.1 percent stake.
But at what cost do you enhance shareholder value at Chrysler or Chase? How do you balance stockholders’ perfectly legitimate short-term needs with society’s long-term needs? We’re not talking about increasing a company’s long-term value by building up the business. Both Chrysler and Chase done that; that’s why they’re targets. We’re talking about what you give shareholders, today, to make them happy, at least for a while.
At Chrysler, the added value consists largely of tapping the cash Chrysler has accumulated to see it through the next downturn in the auto cycle. That cash totaled $7.3 billion at the end of last month. Tapping $5.5 billion of that money to help finance a buyout, as Kerkorian proposes, doesn’t necessarily doom Chrysler. Nor would paying out $4 billion or so as a special dividend, or using that money to buy back stock at a premium price. But there’s no question that it would weaken the company, which has visited the financial intensive-care unit several times and could be in for another trip if the auto business goes into its long-overdue swoon before the reserves are rebuilt.
At Chase, there’s no cash hoard to tap for a big quick gain. Instead, you eviscerate Chase’s labor force by selling the bank at a premium price to a buyer that tries to pay for the deal by keeping most of Chase’s business while firing many of its workers. Chase has cut its work force supply in recent years to increase its profits. To preempt Price, Chase may well fire its own workers faster, its public denials not withstanding. Or who knows? Chase may try to buy another financial institution and fire its workers.
Neither Kerkorian nor Price would be interviewed for this story, but their strategies are obvious: get big stockholders to pressure their targets’ boards of directors to sell out or do something else dramatic to increase the price of their shares. Kerkorian, 77, wants to add to his $2.5 billion fortune; his partner, former Chrysler chairman Lee Iacocca, has various axes to grind. But when it comes to Mike Price, life gets a little complicated. What Price is doing isn’t terribly nice. But he’s legally obligated to produce the highest possible returns for his funds’ shareholders (which include me). In the process, Price enhances his management fee, which is $6 for each $1,000 of fund assets.
Similarly, John Neff, Kerkorian’s biggest cheerleader on Wall Street, has obligations to his Vanguard Windsor fundholders, which include NEWSWEEK employees’ retirement accounts. Neff says that there’s no moral question at Chrysler, because Kerkorian’s plan won’t put the company at risk. “What the hell’s wrong with buying Chrysler?” he said in an interview. Neff’s explanation: the automaker could replace its cash reserves in two or three years-even if business softens. Which it will.
Had Kerkorian or Price made these moves in the 1980s when hostile takeovers were hot and the likes of T Boone Pickens were riding high, Chrysler and Chase would probably have been dog meat by now. But these are the ’90s. Chase is being nice to Price in public, but that may not last forever. Chrysler, meanwhile, is playing hardball, using its Wall Street heft to keep Bear, Stearns & Co. from representing Kerkorian. In addition, the company’s executives are leaning hard on banks not to finance his deal.
If Chrysler and Chase get tipped over, the “value” song will top the charts on Wall Street once again. That’s not a good thing to those of us who remember the feeding frenzies and other takeover excesses of the'80s. After all, it can be a very, very short trip from “Enhancing Shareholder Value” to “Heartbreak Hotel.”
