Kerkorian Sues DaimlerChrysler to Split the Company
Wilmington, Delaware, Nov. 27 (Bloomberg) -- Kirk Kerkorian, DaimlerChrysler AG's third-largest shareholder, sued the German automaker and Chief Executive Juergen Schrempp, claiming the company lied to win support for its $35 billion acquisition of Chrysler Corp.
The lawsuit, filed in U.S. District Court in Wilmington, Delaware, seeks $9 billion in damages and to break up the world's fifth-largest automaker, saying the 1998 transaction was falsely represented as a ``merger of equals.'' DaimlerChrysler didn't immediately comment.
Daimler-Benz's ``true intention was to acquire and subjugate Chrysler, reduce it to division status and fire Chrysler's management,'' Kerkorian, 83, said in a statement. Kerkorian's Tracinda Corp. said it was Chrysler's largest shareholder and now owns about 4 percent of DaimlerChrysler, or about 33 million shares.
The suit is the latest sign of trouble at the company, which has seen its German shares fall about 30 percent since the merger. DaimlerChrysler fired Chrysler President James Holden this month, after his unit lost $512 million last quarter, and replaced him with management board member Dieter Zetsche. A week later, Holden's top aides were ousted.
The lawsuit cites an Oct. 30 interview in London's Financial Times that quotes Schrempp as saying he had always intended to control Chrysler but recognized that Chrysler wouldn't agree to the transaction if it knew his true intent. Schrempp is chairman of the management board and serves as chief executive.
In the interview, Schrempp told the Financial Times ``the structure we have now with Chrysler (as a standalone division) was always the structure I wanted.''
The paper said Schrempp added that ``we had to go a roundabout way but it had to be done for psychological reasons. If I had gone and said Chrysler would be a division, everybody on their side would have said: 'There is no way we'll do a deal.' But it's precisely what I wanted to do.''
DaimlerChrysler shares rose $1.02 to $41.25 in the U.S.
Attempted Takeover
The lawsuit isn't the first time Kerkorian asserted his interests with Chrysler. In 1995, the Chrysler board rejected Kerkorian's proposed $20.51 billion hostile takeover bid, saying it had ``grave doubts'' that the Las Vegas billionaire could arrange financing for his offer.
The backing of Tracinda helped persuade the Chrysler board to support the transaction, Kerkorian said. Tracinda held 13.75 percent of the company when the merger was announced.
Kerkorian seeks more than $2 billion in actual damages, which include an acquisition premium ``denied it by the pretense of a merger of equals,'' the statement said. In addition, Kerkorian asks $1 billion as compensation for the drop in value of Tracinda's Chrysler stake. Tracinda also seeks $6 billion in punitive damages.
Fraud Accusations
Kerkorian contends in the suit that Schrempp misled to investors, the U.S. Securities & Exchange Commission and Chrysler executives about plans for the merged companies. Schrempp portrayed the combination with Chrysler as a ``merger of equals'' to quiet objections to the purchase, always intending to turn the U.S. automaker into a Daimler-Benz unit, the 36-page suit said.
Kerkorian's ``clearly not big enough to take a run at the combined company,'' said Tom Burnett, president of Merger Insight, a New York-based institutional research service firm. ``Everybody's disappointed at how poorly the stock has performed.''
James Glickenhaus, a partner in Glickenhaus & Co., which held 202,664 shares of DaimlerChrysler as of Sept. 30, said he agreed with Kerkorian that Schrempp appears to have misled investors when he was trying to push the merger through. Glickenhaus said he may join Kerkorian's lawsuit.
``To flatfootedly admit that when he courted Chrysler, that he never intended it to be a merger of equals, that was an amazingly stupid admission,'' Glickenhaus said. ``That was basically saying that he had induced Chrysler to merge with him on a fraudulent basis.''
Chrysler Losing Money
Glickenhaus said he would not have supported the merger had he known Schrempp intended to make Chrysler a division of the larger company. He said Glickenhaus & Co. has reduced its DaimlerChrysler holdings in recent months.
The maker of Jeep, Dodge and Chrysler cars is losing money as U.S. new-car sales begin to slip from a record pace, forcing it to pile on discounts and other incentives in an effort to keep inventories from building. DaimlerChrysler sales will likely decline 4 percent to 6 percent this month, Morgan Stanley Dean Witter analyst Stephen Girsky wrote in a report.
Kerkorian may have filed the lawsuit to force DaimlerChrysler to buy back his acquired shares at a premium, a process known as greenmail, said auto analyst David Garrity of Dresdner Kleinwort Benson.
``Smells like greenmail to me,'' Garrity said. ``If (Kerkorian) is bought off, to what extent will this trigger further lawsuits and in what respect will management be held to account to the securities fraud charge?''
Focus on Costs
The company is likely to cut jobs, push suppliers to reduce prices and try to slice manufacturing costs, analysts said. The automaker has 125,000 workers and 12 Chrysler plants in North America.
Chrysler, which is expected to post a fourth-quarter loss, was one of the world's most profitable automakers in the two years before Daimler-Benz bought it in 1998.
For the first nine months this year, Chrysler's profit fell by half to 1.94 billion euros. Its earnings contributed just one- third of DaimlerChrysler's total. That compares to 1998, the year of the acquisition, when Chrysler generated half of all profit.
Kerkorian won't have much luck in court undoing the merger that created DaimlerChrysler, said Paul Regan, a Widener University law professor specializing in Delaware corporate law.
``There's no way a court is going to rescind the merger transaction at this point,'' Regan said. ``There's simply no way to unscramble all the eggs to put things back to where they were.''
Damages Sought
Kerkorian is arguing that Schrempp intentionally misled him and other investors into backing the alleged ``merger of equals,'' and should have to pay damages for their losses, Regan added.
``He's read these interviews Schrempp gave and now he's looking to cash in,'' Regan said. ``Mr. Schrempp is about to be introduced to American-style shareholder litigation.''
The lawsuit appears unlikely to help unionized workers, said Buzz Hargrove, president of the Canadian Auto Workers union.
``Kerkorian is not in there for Chrysler workers,'' Hargrove said. ``He's in there for Kerkorian's shares, and that concerns me.''
Nov/27/2000 17:28 ET
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