Gettelfinger in the ESOP pie?

April 25, 2007

180px-the_boy_who_cried_wolf_-_project_gutenberg_etext_19994.jpgChrysler’s future looks increasingly precarious. Union President Ron Gettelfinger has a tough call to make. He may be able to disrupt progress towards a takeover. Or he may soften the Union’s stance over pension rights with the parent company. But that makes Chrysler a more attractive morsel for a predator. ESOPs offer a possible way forward.

The financials make gloomy reading. Chrysler made a $1.5bn loss last year as its US sales deteriorated. Kirk Kerkorian has tabled a $4.5bn offer. Magna is believed to be considering making a marginally better offer. Parent company Mercedes Benz faces 90% loss of the $40bn it paid for Chrysler in 1998.

How ESOPs may be the way forward

An ESOP (Employee Share Option Plan) is an old idea that has found recent favor in Private Equity deals. In principle, an ESOP is a form of worker incentive through participative ownership. As such, it has a distinctly liberal or (dare I whisper the word?) socialistic ethos. Strange, then, that such an idea would be popular in that most red-blooded of capitalistic barbarians at the gate, the private equity consortia.

Unsurprisingly, The Economist takes a mildly cynical view:

If all else fails, hand the workers some equity. That seems to be the new philosophy of America’s private-equity firms, at least, judging by the bidding war for Chrysler [and The Tribune Newspaper]. ..
Anyone seeking in this the spirit of Robert Owen, the father of the workers’ co-operative, or of Louis Kelso, an American lawyer who invented the ESOP in 1956, is likely to be disappointed.

When Daimler bought Chrysler in 1998, it paid $35 billion. Analysts now value it at no more than $8 billion, though Daimler may be fortunate to get anything close to that for a business that some experts think is destined, sooner or later, for bankruptcy, along with Detroit’s other giant car manufacturers, Ford and General Motors.

On April 5th Tracinda, the investment vehicle of Kirk Kerkorian, a buy-out veteran, offered to pay a paltry $4.5 billion for Chrysler .. Mr Kerkorian’s offer assumes that Daimler will retain some of Chrysler’s crippling health-care and pension liabilities and that the firm’s employees will take a big chunk of equity in exchange for giving up some promised benefits.

Overall, ESOPs seem to improve the performance of firms that have them, which may explain why they are increasingly popular. Some 10 million American workers are members of ESOPs, which together control assets worth an estimated $600 billion. However, it is less clear that they help firms in upheaval or confronting possible failure–such as Tribune and Chrysler.

The Economist argues that the move is more based on financial engineering than on the kind of social engineering required to harness the energies of the workforce towards competing globally, and contributing to a change of fortunes of Chrysler, (and by the same token, GM and Ford). In contrast, the rise and rise of the Toyota phenomenon (Toyataoism) is based on production and social innovation.

The view is one shared by those of more leftist disposition, typified by the following quote. I jotted it down from a lecture by a distinguished social scientist who was discussing worker participation schemes: ‘Scratch an enlightened employer, and not far below the surface you will find an unreconstructed exploitative capitalist’ .

But for all the mistrust, the workers at Chrysler may see such deals as offers they can’t refuse. To them, this is far more than an experiment in financial engineering. Magna, with its track record of employee share ownership, could have the better prospect in that respect. The almost forgotten third way of Kelso may attract more advocates.


Chrysler: The three most-rated raptors

April 9, 2007

286205351_a9245dd0a9.jpgWhen Chrysler-Daimler boss Dieter Zetsche said recently that all possibilities were under consideration for Chrysler, the vultures began to circle. Is it a simply a matter of time? We assess the three most rated raptors. [Update]

As the Easter celebrations began, so did the take-over rumors around the Chrysler division of Chrysler-Daimler. Tracinder, the investment vehicle for the influential corporate investor Kirk Kerkorian is reported to have made a $4.5 billion offer. Other names mentioned include the canadian engineering firm, Magna International, and the once all-powerful General Motors.

Update: I have no firm news to add to the post. However, I should have mentioned that as well as my identified three predators, there were reports of others. The Detroit News has suggested that Chrysler has opened its books to buyout specialists Cerberus Capital Management.

Original Post

In February, I blogged that Chrysler was in big trouble, and that CEO Dieter Zetsche of Chrysler-Daimler had indicated as much, in saying he would be exploring all options with new partners. He had left the door of the Chrysler hen-house open, with the foxes getting bolder by the day. Today I’ve changed metaphor in midstream. It’s not foxes eyeing carelessly-guarded chickens anymore, but vultures detecting some easy pickings.

Commentators had discounted the chances of takeover by non-American bids on various grounds. The product base was too dependent on gas-guzzlers with long-term declining prospects; the American market is notoriously hard for foreign firms to crack (although Toyota is among the ‘invaders’ who have found the successful formula: if it looks like a sheep, baas like a sheep, herds with the other sheep, perhaps it’s not a wolf in sheep’s clothing).

So attention turned to possible North American bids. GM had been mentioned, but had not been tempted by an earlier merger suggestions (by one investor, Kirk Kerkorian) to merge with Nissan and Renault.

Kirk Who?

Mr Kerkorian unsuccessfully opposed the original merger, generating a legal objection, claiming he had been unfairly disadvantaged to the tune of some $billion. He lost that appeal. Now he is back in action. His bid this week requires Chrysler to reach agreement with the United Autoworkers and make progress over unsettled pension and health costs.

Frank who?

Another firm mentioned as interested in acquiring Daimler is Magna. The firm is a relative newcomer, founded by an Austrian entrepreneur Frank Stronach. Mr Stronach emigrated to Canada in the 1950s, and built up a successful auto-business. One of its interesting features is its Governance structure. According to the company web-site,

In 1971 Mr. Stronach introduced his management philosophy, known as Fair Enterprise, to Magna. Fair Enterprise is based on a business Charter of Rights that predetermines the annual percentage of profits shared between employees, management, investors and society, and makes every employee a shareholder in Magna. These rights are enshrined in a governing Corporate Constitution.

And GM?

The old lady has not yet offered a convincing enough denial. The lack of a denial has been enough to induce a few trading jitters. When the news of Kirkorian’s bid came through, GM strengthened. One analyst suggested that the reduced possibility of GM becoming involved with Chrysler helped rally investors.

A three-horse race or a chess tournament?

The moves are taking place as Daimler-Chrysler shareholders met in Berlin for its annual meeting. There were strong representations to the company to get rid of the Chrysler operation.

Chief executive Dieter Zetsche admitted that the group has started negotiations with a number of parties about the sale of Chrysler and was reported by the BBC as saying

“I can confirm that we are talking with some of the potential partners who have shown a clear interest .. We need to keep all options open and I cannot disclose any details, because we need to have the maximum scope for manoeuvre”

If this were a chess tournament it would have the highest rating for the caliber of Grand masters taking part.. But unlike a chess tournament, we don’t even know the full list of competitors.


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