Chrysler's brilliant turnaround strategy has been injured by its attempt to get the federal government to refrain from exercising warrants granted in return for the promise of loan guarantees. The effort to revise this provision of the 1979 rescue package was a serious public rela- tions blunder and may not have been in the company's financial self-interest in the first place.
The deal that Chrysler worked out during 1979 and 1980 involved paying the government an annual fee of 1 percent on outstanding, federally guaranteed loans and issuing to the government 14.4 million warrants (or options) to purchase Chrysler stock at $13 a share. Chrysler also convinced its banks to forgive $1.3 billion of debt plus overdue interest in exchange for $190 million in cash, $1.1 billion in preferred stocks, and 13.3 million warrants. In addition, Chrysler forced the UAW to agree to significant wage concessions in exchange for an employee stock ownership plan. Finally, money was also raised from suppliers and auto-producing states.
Now, four years later in a booming stock market that has seen Chrysler stock soar from $5 a share to $28, Chrysler has found an ingenious way to give the banks a shot at recouping some of their loans that had been converted into preferred stock during the rescue operation. This spring, Chrysler issued 35 million shares of new common stock, which the banks took in exchange for the $1.1 billion of preferred stock and most of their 13.3 million warrants.
The effects of this transaction were twofold. First, the banks received over $400 million in cash for credits that had long been written off. Second, Chrysler was able to convert the preferred stock into common equity, thereby improving the company's balance sheet and increasing its capacity to raise funds in the public market.
Chrysler's next move was to offer to pay off the most expensive portion of the federally guaranteed debt--a loan of $400 million carrying a 14.1 percent rate. According to company announcements, $200 million of this amount is to be financed by new borrowings, most likely via a publicly issued debenture. As it now stands, the remaining $200 million will come from the com- pany's cash balance of approximately $900 million --all of which has been generated through as- set sales and reductions in inventories and accounts receivable rather than from operating earnings.
Here is where Chrysler's proposal to cancel the government-held warrants comes into question from a financial point of view. If the government were to exercise its warrants now, it would have to pay Chrysler over $180 million (14.4 million warrants times $13). This is almost equal to the additional amount Chrysler needs to pay off the $400 million portion of its debt obligation without running down its own tight cash position. Indeed, if the government's warrants were exercised it would have the effect of helping Chrysler restructure a portion of its debt and reduce its annual interest cost by nearly $40 million without requiring a significant cash outflow. According to this logic, Chrysler's financial self-interest could best be served by encouraging the government to exercise its warrants as soon as possible.
Since this logic was apparently not shared by Chrysler, then perhaps it made different assumptions about its financial self-interest. Perhaps Chrysler executives believe that the company will
be so prof itable this
year and next
that cash flow is
not a short-term
problem. Perhaps the
company felt that the
opportunity cost of allow ing the government to buy
stock at $13 when the market
price is close to $30 is simply
too high, thereby diluting
the equity of shareholders
needlessly. Whatever their assumptions, it was neither correct or advantageous for Chrysler to attempt to renegotiate the deal struck four years ago. It will surely encourage the UAW to disregard commitments and principles established during the rescue process. Here is where Chrysler's public relations blunder has been most costly.
Chrysler's production employees have been disgruntled for a long time. Since the early 1970s, Chrysler has pursued a strategy of domestic contraction, coupled with more purchases of components and assembled vehicles from abroad. Jobs at home have, in essence, been traded for a run at corporate survival. Chrysler now employs less than one- half of the number of employees it did when the Chrysler Loan Guarantee Act of 1979 was passed by Congress. As the initial round of voting on the 1982 labor contract shows, many of those employees who remain are antagonistic to management. In addition, the work force is largely committed to regaining wage parity with employees at Ford and General Motors, even if it means destroying whatever competitive advantage their employer possesses.
By lobbying for the return of warrants held by the government while at the same time touting their financial strengths, whatever remained of the "equality of sacrifice" principle established during the rescue operation has been jeopardized. To the UAW, Chrysler appears intent on improving the position of its shareholders, not its employees.
Although the UAW pension fund holds a large chunk of Chrysler stock, the appearance of the company reneging on past deals will encourage UAW members to forget any thoughts they might have had about their responsibility "to create more" wealth than "to get more" money from management. The economic demands made by labor during contract negotiations starting later this year will inevitably stiffen.
Despite the ill-conceived campaign to get its warrants returned by the government, Chrysler's energetic and creative managers deserve sympathy from the public. Theirs is a difficult problem of bolstering consumer confidence and showing the banks that they have not been forgotten, while at the same time tapping every possible source of funds and asking their shrinking labor force not to eliminate the company's cost advantage through increased wage demands. Almost any attempt to change policy, regardless of its merits, is bound to inflame one of Chrysler's active constituencies. Chrysler is painfully learning how to live in a world where its corporate strategy must be negotiated out in the open.