THE SUNSHINE BOYS

By Richard Lacayo

THE AUDITORIUM AT THE CHRYSLER technology center in Auburn Hills, Michigan, was dense with emotion three years ago when Lee Iacocca attended the company's annual meeting for the last time as chairman of the board. A few months earlier he had agreed to step aside in favor of Robert Eaton, a former General Motors executive who was Iacocca's own choice to succeed him. Now here he was at 67, having brought the giant carmaker back from the edge of bankruptcy twice in 10 years, summing up a fabled career. Though he had lived every boy's dream of becoming a cowboy, he told the crowd, "nobody gets to be a cowboy forever." There was a standing ovation. Such was the beauty of the moment that only afterward did anyone notice that Iacocca had neglected one detail of the final ceremony. Wasn't he supposed to hand over the chairman's gavel to Eaton?

Cut to the chase. Last week Iacocca stunned Wall Street and the auto industry by joining with the billionaire investor Kirk Kerkorian, 77, in a spectacular bid to take over the nation's third largest automaker. After three months of downward drift in the value of Chrysler stock, Kerkorian offered investors $55 a share, a 40% premium over the $39.25 price it posted one day before the bid went public.

If it happens--a big if--the $22.8 billion deal would be the largest takeover since RJR Nabisco was bought six years ago at $25 billion. However audacious, it would be nothing out of character for Kerkorian, a lifelong dealmaker who loves to buy companies but doesn't much like to run them. At MGM/UA, the movie studios he bought, then stripped of their most valuable assets, he juggled management regularly but rarely interfered in studio decisions. He never even attended screenings. "When he went to the movies, he'd stand in line with everybody else at a theater in Westwood or Hollywood and wouldn't even ask for a pass," recalls Alan Ladd Jr., who ran the studio for four years under Kerkorian. "When A Fish Called Wanda opened, he went out three different times to go see it, but the theaters were so packed he couldn't get in."

Iacocca is just the opposite. In the same breath that he denies any ambition to return to management, he sketches out plans for the company's future. Though he brings a relative pittance to the deal in Chrysler stock--about $50 million--the value of his reputation, and the credibility it lends to Kerkorian, is priceless. And as Iacocca knows, with this deal he again puts it on the line. Revered as the man who would not let Chrysler fall, could he also be a man unable to let it go?

Eaton was in New York when he got news of the bid in a phone call from Kerkorian. To placate Kerkorian, he had already agreed in November to raise Chrysler's dividend and start a $1 billion stock-buyback program to increase the company's share price. But here was a move that left nothing to talk about. "I'm going to fight you on this," he told Kerkorian. Canceling a speech at the New York Auto Show, Eaton flew back to Detroit to huddle with the board. No sale, they announced late that night, especially since Kerkorian was planning to finance his purchase partly by using most of the $7.5 billion cash reserve the company had put aside to see it through bad years. Said Eaton: "We don't want to put Chrysler at risk."

Chrysler is already at risk, or at least in play. Kerkorian's bid means that the company's managers will have to scramble to defend themselves. In 1990, in the midst of a recession that brought the company to the edge of bankruptcy for the second time in a decade, Kerkorian's Tracinda Corp., named for his daughters Tracy and Linda, started buying Chrysler stock at $12.37 a share. By now he has spent about $676 million accumulating a 10% stake. Noting that he had not lined up a cent in financing for his takeover bid, some Wall Street analysts suspect that his real aim is not to buy the company but to push up the value of his stock. Merely by announcing his intentions, Kerkorian boosted Chrysler's stock price $9.50 a share. That was still $6.25 below his offering price--a sign that Wall Street was not fully convinced the bid was for real. But it increased the value of his $1.4 billion stake by $355 million. If another buyer emerges to outbid him, it would send his stock up further still. Or he could play the greenmailer, persuading Chrysler management to offer him a premium on his shares as an incentive to go away.

Then again, he might just actually bag the big prize, take Chrysler private for a few years, then sell it back to the public for a hefty profit. Can he truly finance the buy? In addition to the money he expects to draw from Chrysler's reserve fund, his purchase plan calls for $3.5 billion from other investors and $10.7 billion in bank loans and other borrowing. Kerkorian's people also hint that some of the money to buy Chrysler might come from foreign auto companies. In the immediate wake of the deal offer, however, none has shown the cash or the inclination.

Some analysts say Kerkorian's bid actually underestimates the company's underlying value. If the U.S. economy manages to maintain moderate growth with low inflation, car sales might not suffer as they did in the last recession. And a seasoned asset stripper like Kerkorian might not hesitate to sell off some of the company's high-performance divisions, like Jeep. "I think it's a $100-per-share stock," says David Cole, head of the University of Michigan's auto-industry think tank.

All of which could be great news for shareholders. What Chrysler and its employees stand to gain is another question. Since 1990 the company has made a tremendous turnaround, streamlining its design and manufacturing process to become the most profitable U.S. automaker. It also shed nonessential businesses like Gulfstream corporate aircraft, acquired in the 1980s under Iacocca. For 1994, Chrysler reported a record profit of $3.7 billion on revenues of $52 billion. Dodge Ram pickup trucks, Cirrus sedans and the Jeep Grand Cherokee were established hits, and promising new products like the Neon had come on market. Toyota engineers even went to the trouble of disassembling a Neon to study its workings.

All the same, just one day after Kerkorian's bid was made public, the company reported a 37% decline in earnings for the first three months of this year. Chrysler execs blamed high launch costs for its redesigned minivan and the $115 million expense to make free repairs on a faulty rear-door latch on older minivans--as well as a 7.2% decline in sales. Consumer Reports has grumbled about reliability problems on the 1995 Jeep Grand Cherokee and the Dodge Intrepid. And competition is getting tougher in the minivan, pickup and sport-utility fields that made Chrysler's revamped reputation. Though Eaton could still defend the numbers as "the second best pretax earnings we've ever had," that hasn't been enough to stop his company's shares from losing more than 20% of their value between January and mid-April.

Among Chrysler's top managers, some of whom question the wisdom of decisions Iacocca made for the company when he ran it, there is grumbling now that their former boss, susceptible to Kerkorian's unwholesome charms, is putting the company in jeopardy to satisfy his own ambition. "They are shocked and pissed,'' says one board member. "It's '80s greed vs. '90s forward-thinking management. Iacocca's involvement is really getting under people's skin.'' Certainly there's a prospect of money in the deal for him. For all his wealth-$200 million at last estimate-Iacocca has never been able to move as an equal among the billionaire financiers who own companies and don't just manage them. At Kerkorian's $55 offering price, his $50 million in Chrysler stock would increase in value $20 million, and more if another buyer steps forward. "I'm not greedy, but I watched the stock go from $59 to $39 in 12 months," Iacocca told Time last week.

But while money is part of it, the deal can be fully understood only by laying the spreadsheets over a psychoanalyst's couch. For Iacocca, triumph followed by setbacks and then vindication has been a lifelong theme. "After Chrysler's bailout," says a close associate of Iacocca's, "the Secretary of the Treasury saw him arriving at a football game in his private jet. He called him and told him to get rid of the plane. Lee did, but then turned around and bought Gulfstream. Don't get mad, get even. That's pure Lee.'' His best-selling autobiography opens with the 1978 scene of his being booted from his job at Ford, the company where he introduced the Mustang and rose swiftly to the top. His departure from Chrysler was more dignified, but not without its bumps. In 1992 the board, looking to forge a new image for the company, eased him out as chairman despite his lobbying to stay on a few more years. Returning to power at Chrysler would be sweet.

Sweeter than retirement, certainly, which hasn't provided Iacocca an arena commensurate with his status as a national hero. It is all very well to start up a business that sells olive-oil spread or to promote gambling casinos on Indian reservations--two of his recent pursuits--but it doesn't compare with having the President return your calls. In September he filed for divorce from his third wife. She later countersued, challenging their prenuptial agreement and accusing him of hiring detectives to spy on her in their home in Beverly Hills, a charge he denies.

Iacocca insists the takeover bid is not a strategy to get the old cowboy back in the saddle. "I'm an investor, period," he says. "No directorship, no management, nothing--zero." But even as he says that, he can't resist kibbitzing. For one thing, Iacocca has wanted for years to make Chrysler a truly international operation with sales and manufacturing capabilities around the world. In the 1980s he tried to enter his company into deals first with Volkswagen, then with Fiat, but to no avail. "We do not have a global presence," he complained last week. "We're big in Canada and we're strong in the U.S. Other than that we really have no position." The current Chrysler management might well ask who exactly is "we."

Iacocca also thinks the company can afford to spend down some of its cash reserve. Auto manufacturers suffer the problems of other cyclical industries. The same domestic auto industry that had record earnings of $14.6 billion last year posted a whopping $7.6 billion in losses back in 1991. But the $7.5 billion put aside by Eaton, says Iacocca, is too much. "The most we ever needed in severe downturns was four to five [billion]," he says. Keep $2.5 billion in cash on hand, add the company's $2.5 billion bank credit line and "you're fine," he says.

No way, says Eaton. "If you go through the numbers and look at the cash we went through the last time around--when we had a much lower capital-spending plan--we believe it's absolutely prudent to have that kind of cash [the $7.5 billion] around." The Kerkorian bid has already had one negative impact on the company's ability to borrow. Reasoning that any takeover could leave the company saddled with unmanageable debt, all three credit-rating services quickly placed Chrysler's outstanding debt on their watch lists.

Debt doesn't scare Kerkorian. There is always something you can sell to pay it off. After he bought MGM in 1969, he sold off the studio's choicest assets, from its immense library of old films to warehouses filled with props and other paraphernalia. Later he added United Artists, but for him it has always been the deal, not the business. In one famous Ping-Ponging transaction, he sold MGM/UA to Ted Turner for $1.5 billion in 1986, then bought back everything but the film library for less than $800 million, and then sold it all again in 1990 for $1.3 billion.

Dealmaking seems to satisfy the gambler in Kerkorian, a man more at home in Las Vegas than in Hollywood. After World War II he bought refurbished planes to fly bettors from Los Angeles to the casinos. From that he developed a small airline, which he sold in 1968 in a deal that eventually brought him $104 million. That money helped him build and then sell ever larger Vegas hotels, a sequence he capped with the 1993 opening of the $1 billion MGM Grand, with its 5,005 rooms, 15,000-seat arena and 33-acre theme park.

That's a lot of glitz for a man universally described as low key, soft-spoken and unfailingly polite. But in a crunch he can be ruthless in taking a company apart. The company he is aiming at now is the one Iacocca spent the best years of his life preserving. "I've got 47 years of good reputation at stake," says Iacocca. "I don't want to be tainted as somebody who went in there for a quick buck." Even so, the quick bucks are a good bet. It's all the rest that's up in the air.

--Reported by Tom Curry and Barrett Seaman/New York, William McWhirter and Joseph R. Szczesny/Detroit and Jeffrey Ressner/Los Angeles

With reporting by TOM CURRY AND BARRETT SEAMAN/NEW YORK, WILLIAM MCWHIRTER AND JOSEPH R. SZCZESNY/DETROIT AND JEFFREY RESSNER/LOS ANGELES