Free at Last

Chrysler's federal period ends

Applause was heard all around last August when a revived Chrysler paid back the last of its $1.2 billion in Government-backed loans seven years ahead of schedule. But one bothersome problem still remained. That was the matter of the Government's right to buy 14.4 million shares of Chrysler stock, which had been given in 1980 as a sweetener for the loan guarantees. Last week Chrysler bid $311 million to buy back the stock rights and snipped even that strand. Thus, with the exception of $215 million owed to various states, Chrysler has once again become a company financed entirely by private investors.

The so-called warrants entitled the Government to buy 14.4 million shares of Chrysler at $13 per share. No one took them too seriously in 1980, because Chrysler stock was then selling for only about $5.50. But as the company's fortunes improved and the stock began rising toward $30 a share, the warrants looked more and more handsome. Should the Government ever exercise them and actually buy Chrysler stock at less than half the current price, the Treasury stood to earn millions of dollars.

But such a move would have hurt Chrysler. The company would have been forced to issue 14.4 million more shares of stock to cover the warrants. That would have diluted the value of current stock, undercutting the worth of shares held by Chrysler stockholders and making it harder for the company to raise money for future needs.

Chrysler's first attempt to deal with the warrants was clumsy. It asked the Government in May simply to give them back. Washington refused. In July, Chrysler tried a new tack. It offered about $218 million for them, but again was rebuffed by Treasury officials who felt they were worth more. Finally the Government decided to put the warrants up for bidding on the open market.

Chrysler then began playing a subtle cat-and-mouse game. Publicly, the automaker feigned a lack of interest, saying it might not even make a bid. But behind the scenes, the company was working with Investment Banker David Schulte, a Salomon Bros, vice president, on a deal. Schulte helped craft a bid by using a formula that subtracts the price of the warrants ($13) from the stock's actual price on the day of the bidding ($29.50). Using that amount ($16.50) as the base price, Schulte had to figure out how much of a premium Chrysler would have to pay to be sure to get the warrants.

In July Shearson/American Express offered about $3.60 higher than the base price, so Schulte knew he would have to go above that. Chrysler Chairman Lee Iacocca last week sent Robert S. Miller, executive vice president of finance, to New York City with a Spartan dictum. Said Miller: "He told me that if the bid was a penny too low or more than a dollar too high not to come home."

When the stock market closed last Monday at 4 p.m., a group of Salomon and Chrysler executives was already meeting in the Salomon offices on the 41st floor of 1 New York Plaza in Manhattan. Salomon advised Chrysler to set the premium at $5 and to add 10.20 as a "tail" to make sure there was no tie, making the total bid $21.602 per share. Then at 4:20, just ten minutes ahead of a deadline set by the Treasury, a Salomon agent dropped the bid into a slot in the northwest conference room on the tenth floor at the New York Federal Reserve Bank building on Liberty St. The Chrysler bid was the highest, and by the margain Iacocca had demanded. It was just 93.40 per share more than the second highest bid of $20.668, which was made by a group headed by Goldman, Sachs.

The $311 million payment for the warrants was only one of several to come out of Chrysler's smoking checkbook these days. During the past two weeks, the company promised to pay $117 million in back dividends on preferred stock, scheduled a $250 million payment to its pension fund and reached a $1 billion wage deal with the United Auto Workers. That settlement returns to Chrysler workers the bulk of the paybacks the union employees had given to keep the company afloat.

Now that the Government has been totally paid off for the Chrysler loan guarantees, Iacocca calculates that Washington earned $800 million in interest and fees on the deal. That works out to the equivalent of a 24% annual interest rate. Said Iacocca wryly: "I guess we can take some pride in having made a solid contribution to reducing the federal deficit." This file is automatically generated by a robot program, so viewer discretion is required.