A Daredevil Wheel Deal

By George Russell

To many auto-industry watchers, the deal was a masterstroke, another example of the dazzling acumen of Chrysler Chairman Lee Iacocca. To others, it was an expensive maneuver laden with risks that could cost the No. 3 U.S. automaker dearly in the future. Either way, there was no denying that the flamboyant Iacocca set corporate America abuzz last week with the announcement that Chrysler had agreed to buy a controlling interest in American Motors Corp., the longtime also-ran of the U.S. auto industry, from the firm's major shareholder, France's Renault. Code-named Project Titan at Chrysler headquarters, the deal is the most daring move that Iacocca has made as the architect of Chrysler's dramatic comeback from near bankruptcy in 1979.

Chrysler's outlay for AMC, including a proposed $4-a-share purchase of stock from other shareholders, is expected to be at least $1.1 billion. That could be a steep price to pay for a company that lost $91 million last year on sales of $3.5 billion. But Iacocca has coveted several valuable AMC assets. Among them: AMC's popular Jeep division, which sold a record 207,514 vehicles last year; a new Renault auto-assembly plant in Canada built for $340 million but now worth an estimated $800 million; and AMC-Renault's 1,472 North American dealerships.

The Chrysler-Renault agreement was the highlight of a surprisingly wild week of merger activity, which came at a time when many Wall Streeters had been expecting a slowdown in takeover bids because of tax reform and the insider- trading scandal (see following story). Chrysler, which began considering the AMC purchase last summer, estimates that it missed out on $100 million worth of potential tax write-offs on the deal on Jan. 1 because the advantages were eliminated by the reform legislation. Nonetheless, Iacocca was determined to buy AMC. Said he: "((The merger will)) strengthen both of us in what's already become a tough market."

The proposed acquisition will not shake up the rankings in the $230 billion- a-year U.S. auto industry. For increasingly robust Chrysler (1986 profits of $1.4 billion on sales of $22.6 billion), the deal would merely add AMC's piddling .7% car market share to the bigger firm's 10.3%. That would still leave the merged company far behind No. 2 Ford (18%) and GM (39.6%). But the purchase will help Chrysler solve a pressing problem: its factories do not have the capacity to produce enough cars to meet demand. Chrysler had started easing that production crunch by contracting out the assembly of various Chrysler, Dodge and Plymouth models to AMC's venerable Kenosha, Wis., factory, where the Renault Alliance is also produced.

More important, perhaps, the purchase of AMC's Jeep line helps Chrysler, which has led the way with such innovations as the minivan, leap into a market segment where it is not represented: the fast-growing sport-utility line. Some 732,000 sport-utility vehicles, including such models as the Jeep Cherokee, Ford Bronco II and Chevy S-10 Blazer, were sold last year, offering a new kind of competition to the suburban station wagon. That total could reach 1 million by 1991.

Along with AMC's assets will come some sizable debits. Product-liability suits claiming damages of more than $1.7 billion have been filed against AMC for turnover accidents in Jeeps. Those injured claim that, among other things, the vehicle's roll bar offered inadequate protection. Under the proposed agreement, Chrysler will assume liability for any damages assessed up to an undisclosed ceiling, and Renault will help with any payments above that.

For Renault, the results of the deal are mixed. In effect, the company is bowing out of North American auto production, which it entered when it first signed a joint marketing agreement with AMC in 1979. The timing of the retreat is peculiar. AMC is about to introduce a new midsize sedan, the Premier, in October. The car, expected to sell for around $12,000, will still be built at the Canadian plant that Renault has now agreed to sell to Chrysler. This month Renault has begun exporting to the U.S. a new $10,000 compact, the Medallion, which Chrysler would continue to market. In addition, a new $30,000 Renault sports car, the Alpine, is due to appear in the fall, and that too will be sold by Chrysler. Said one AMC board member last week: "It's as if Renault had come to the end of nine months and decided it didn't really want to be a father."

In Paris last week, Renault Chairman Raymond Levy emphasized that the proposed sale to Chrysler was "not an admission of failure." But he added that "we must concentrate our forces on our core businesses in Europe and not disperse them elsewhere." Translation: the financially battered, government- owned French company (estimated 1986 losses of $660 million or more on sales of around $21.6 billion) has spent $650 million during the past eight years in gradually assuming its controlling interest in AMC, but to little avail. Last year AMC's sales of the Alliance amounted to only 77,005 cars, down 41% from 1985 and the worst figures the company has released in 30 years. Renault still hopes to export some $5.8 billion worth of autos and spare parts to the U.S. over the next five years.

For AMC, last week's announcement was, of course, a milestone. Even though Iacocca said AMC will remain intact as a Chrysler subsidiary, at least for a time, the sale agreement marks the demise of a firm with origins that date back to 1902 and the production at Kenosha of the firstone-cylinder Rambler automobile by the Thomas B. Jeffery Co. A series of mergers culminated in the formation of American Motors in 1954. In the late 1950s and early 1960s, under the chairmanship of George Romney, the company carved out a niche for itself as a groundbreaking producer of small classics like the Nash Rambler, in competition with what Romney called the "gas-guzzling dinosaurs" of Detroit's Big Three. After Romney's departure, the firm tried to compete head to head with the Big Three, with increasingly dismal results. The company's last big coup came in 1970, when it bought Kaiser-Jeep, the manufacturer of the descendants of those rugged vehicles that become famous for carting around the American military during World War II

The Chrysler-Renault announcement was greeted with moderate amounts of jubilation by AMC's 19,500 workers. Says Cliff Shively, 34, a driver at Jeep's assembly plant in Toledo: "Whatever Iacocca touches turns to gold." The 5,400 workers at AMC's Kenosha plant had already voiced their approval of the chance to produce Chrysler and AMC vehicles side by side. But that may change when some of the creaky AMC facilities Chrysler is buying become prime candidates for shutdown.

Pulling together the Chrysler-Renault agreement was a marathon effort that was often in doubt. The push last summer to make a deal was started at Chairman Iacocca's behest, about three months after Chrysler began negotiating the pact to lease AMC production facilities at Kenosha. The talks were suddenly and tragically stalled last November when Renault's chairman at the time, Georges Besse, was assassinated by terrorists. The French government appointed Levy as Besse's successor a month later. Iacocca and Levy did not meet for the first time until Feb. 5. The agreement was finally sealed by Chrysler Corporate Vice Chairman Robert Miller and his Renault opposite numbers in a 30-hour nonstop negotiating session over the March 8 weekend at the Paris offices of Sullivan & Cromwell, a Wall Street law firm. Recalls Miller: "It was a little steamy in there. None of us really brought much laundry."

Last week only a few voices were raised to wonder if Chrysler had taken itself to the cleaners. One of them, however, belonged to the influential Standard & Poor's credit-rating service. It announced that as a result of the AMC deal, Chrysler's credit rating was being placed on a watch list, with "negative implications." S.&P. estimated that the arrangement would cost Chrysler $2 billion and said the company was receiving in return a "business with questionable prospects . . . all of which will add to Chrysler's fixed overhead and increase its break-even point at a time that the industry faces a glut of automaking capacity."

Pessimism on Wall Street is unlikely to deter Iacocca, who has already brought Chrysler back once from the abyss. Nor is his confidence likely to be squelched by any fears about job security. In February, on the same day that he met with Renault's Levy, Iacocca signed a new multimillion-dollar contract with Chrysler that keeps him in the chairman's job for four more years. He will have plenty of time to discover for himself whether the razzle-dazzle deal with Renault will work out for the best.

With reporting by William J. Mitchell/Detroit and Harriet Welty/Paris