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Case Study Analysis
Financier Kirk Kerkorian and former Chrysler Chairman Lee Iacocca dropped a bombshell on April 12,1995, when they announced that Kerkorian’s Tracinda Corp was set to launch a hostile $20 billion, $55 per share, bid to take over Chrysle. Prior to the bid, Kerkorian and Iacocca held roughly 10%of Chrysler shares. Far from dissatisfied with the performance of Chrysler management or Chairman Robert Eaton, Iacocca’s hand-picked successor, Kerkorian and Iacocca in Chrysler were merely disappointed that Chrysler’s stock price had failed to reflect the dramatic turnaround in Chrysler’s fortunes. Since taking the helm in 1992, Eaton had guided Chrysler through tricky new product introductions for its flagship Jeep and minivan brands, pared debt, and boosted return on equity to a sparkling 30%+. Under Eaton’s leadership, Chrysler had also accumulated a cash hoard of nearly $7.5 billion or roughly $21 per share, to guide Chrysler through the next downturn in the auto industry. Therein lies the rub; Kerkorian and Iacocca argued that Chrysler’s cash hoard was far in excess of required cash reserves. By announcing their leveraged buyout bid, Kerkorian and Iacocca hope to return some of this excess to shareholders and recoup some of the loses shareholders experienced when Chrysler stock plummeted from a high of $63.50 per share in January 1993, to a pre-bid price of only $39.25.
While memorable for its audacity the Kerkorian and Iacocca bid for Chrysler is but one of a growing number of instances where the top management of the giant corporation is facing increasing restive shareholders. In the late 1980’s, for example, a long downturn spiral in market share and profitability, led major shareholders to push for dramatic change at auto giant General Motors. Not only was Chairman and CEO Roger Smith fired, but his successor Robert C. Stempel was also sacked during a celebrated palace revolt in April 1992, when Stempel failed to stem the tide of dismal profit performance and bungled corporate strategy. At the time, John F. Smith, Jr. the former chief of GM’s profitable foreign operations, was promoted to the post of GM president and given the unenviable task of turning the company around. In the early- 1990’s and only following unrelenting pressure from the shareholders to divest nonessentials businesses and focus on its core retailing outlets, retail giant Sears shed its Dean Witter brokerage, Discover charge card, and Allstate insurance operations. While Chairman, President and CEO Edward Brenan was able to save his job, he only was able to do so because he engineered many of the changes demanded by activist shareholders. In another case, James Robinson III faced the same fate as his contemporaries at GM when poor performance at travel and financial services giant American Express forced the board of Directors to sack its chairman and CEO. In August 1993, Harvey Golub former head of American Express’s mutual fund division, assumed the top job and promptly moved to dicvest the First Data Corp transaction processing subsidiary, Sheason brokerage, and Lehaman Brothers investment banking business. Like Sear and GM, American Express and its shareholders enjoyed a strong rebound in operating performance.
In many other instances, shareholder-led boardroom revolts have led to dramatically improved performance for trimmed down and refocused corporate giants. After such stunning success in improving management strategy and operating performance, stockholders and stockholder groups have finally gotten the respect they deserve from the companies whose shares they hold. Today, perhaps as never before, big pension funds and stockholder groups have been brought into corporate concerns. Because many important issues must be dealt with confidentially, this new direction in corporate governance is sometimes invisible to outsider.
In some cases, the companies themselves have initiated discussions with institutional shareholders over such issues as how many independent directors should sit on the board of directors, or the rationale and design of the poison pill defenses which limit the potential for unfriendly takeovers. In many instances, shareholder groups are being asked for nominees to corporate boards of directors. When companies become attentive to shareholder interest, it eliminates the need for old pressure tactics, and gives shareholders the opportunity to actively participate in the development of operating policy and competitive strategy.
Does incompetence by top management and corporate boards of directors invalidate the value-maximization theory of the firm?
Many shareholder groups prefer to split the chairman and CEO posts, and install an outsider as chairman of the board of directors. From the shareholder viewpoint, discuss some of the advantages and disadvantages of an Aoutside@ chairman.
Shareholders often want change when corporate performance is poor, top executive pay is excessive, and/or management is unresponsive. However, removing corporate directors by shareholder vote remains almost impossible. In annual proxy contests, shareholders are generally offered only one slate of candidates, and they can express their dissatisfaction only by withholding votes from would-be board members. Does this mean that the current shareholder voting process is an ineffectual means of corporate control? How might this process be improved?
In addition to casting their vote in annual proxy contests, shareholders Avote with their feet@ when they sell the stock of poorly performing companies. How is this likely to influence inferior performance by top management and the board of directors?