NEW YORK (CNNfn) - Investor Kirk Kerkorian has sued DaimlerChrysler AG for $9 billion, claiming that investors were fraudulently induced to support the German company's 1998 purchase of the third-biggest U.S. automaker.|
Kerkorian's suit was filed in U.S. District Court in Delaware Monday by the investment firm Tracinda Corp., of which he is sole owner. The suit demands $9 billion in restitution to Tracinda, one of the largest shareholders in DaimlerChrysler AG, as well as the breakup of DaimlerChrysler.
It says that the German executives now running the company never intended to live up to their promise that the combination of Daimler Benz and Chrysler Corp. would be "a merger of equals."
"Had Mr. Kerkorian known the truth, Tracinda would never have agreed to vote all of its shares for the merger," said the suit. "Significantly, Chrysler's board would never have approved the merger without Tracinda's approval and the transaction would never have been closed."
Tracinda also "seeks to unwind the transaction so that Chrysler will once again be an independent corporation owned by Chrysler shareholders."
DaimlerChrysler's only immediate comment was a two-sentence statement released late Monday: "DaimlerChrysler has not received a copy of the complaint. Based on the statement by Tracinda, the allegations appear to be completely without merit." Daimler officials were not available for comment Tuesday morning.
DaimlerChrysler (FDCX) stock slid almost 2 percent in Frankfurt Tuesday morning, standing at 46.49, not far above the 52-week low of 45.13 it plumbed last week.
Industry observers said the firm would take the lawsuit seriously. An analyst at a European investment bank told CNNfn.com that Kerkorian's likely aim was to force Daimler into mounting a stock repurchase operation to boost the share price. He successfully pressured the company into doing this twice in Chrysler's pre-Daimler incarnation.
"They (DaimlerChrysler) have a legitimate excuse for not doing this," said the analyst, who spoke on condition of anonymity. "They are bleeding cash at Chrysler, it's time to consolidate cash, not give it away." He added that the financial situation at Chrysler "would get worse before it gets better".
Kerkorian had sought to gain control of Chrysler in 1995. He lost his representative on the company's board as a result of the 1998 acquisition.
Many of the top Chrysler veterans have left top positions in the company in the past year, including co-chairman Bob Eaton, who helped negotiate the deal with Juergen Schrempp, who is now the sole chairman of the company, and James Holden, fired as Chrysler chief executive earlier this month. The suit says those and other departures are hurting the company.
"[Schrempp's] cavalier attitude toward the American executives who believed his prior promises and the welfare of Chrysler's employees has so devastated the company that Mr. Schrempp has been forced to apologize to over 400 of Chrysler's managers to maintain order and in an effort to prevent the further downward spiral of DaimlerChrysler's stock, which has dropped approximately 18 percent in the last three weeks," charges the suit.
As for the suit's charge that Schrempp never intended to live up to his promise of a merger of equals, the suit quotes an interview in the Financial Times in which the German executive is quoted as saying, "The structure we have now with Chrysler (as a standalone division) was always the structure I wanted....We had to go a roundabout way but it had to be done for psychological reasons. If I had gone and said Chrysler would be a division, everybody on their side would have said, 'There is no way we'll do a deal.' But it's precisely what I wanted to do."
DaimlerChrysler's stock has been in a slide recently, plagued by concerns over the loss of U.S. leadership as well as losses at Chrysler and repeated earnings warnings. Chrysler reported a loss of $512 million in the third quarter, and there have been unconfirmed press reports that the company estimates its loss for 2001 could be as high as $2 billion.
Union won't entertain cost cuts
The recent losses and excess inventories prompted the new managers to announce the temporary closing of three plants on Nov. 17. Reuters reported Monday that the UAW, which represents about 76,000 U.S. hourly-paid employees of the company, rejected as unworkable a reopening of the contract reached just last fall to discuss more extensive cost savings.
"I don't see how they can justify it, asking us for any kind of concessions," Reuters quoted an unidentified UAW official as saying.
Last week, in the wake of the plant closures, DaimlerChrysler's Chief Financial Officer Manfred Gentz alluded to possible job cuts and the company said it was seeking to amend Chrysler's deal with the union. Officials now say Gentz was misquoted and any moves would first
have to be discussed with the UAW.
Trevor Hale, a spokesman for DaimlerChrysler, said the new management team was still trying to formulate cost-cutting plans and has yet to meet with UAW or Canadian Auto Workers union officials about plans.
"They're just beginning to look at an operational and strategic business review. Part of that is a look at employment and plant utilization," Hale said. "No decisions have been made so far. Once we meet with the UAW and CAW and we come up with plans, we'll let people know. Until then, it is not appropriate to comment on any of it."
Suit seeks $6 billion in punitive damages
Kerkorian's suit seeks $2 billion in actual damages, including the loss of the acquisition premium that was not included in the deal due to its "merger of equals" status. It also seeks $1 billion that it says it lost in the value of the stock since the deal was closed, as well as punitive damages of $6 billion.
The suit seeks the damages for Tracinda alone, not all Chrysler shareholders. Tracinda owned 13.75 percent of Chrysler shares at the time of the Daimler acquisition, and still owns about 33 million, or 4 percent, of the combined DaimlerChrysler shares.
The suit suggests that one way to compensate the Chrysler shareholders is to unwind the deal, but it also says it would be satisfied with monetary damages, said Terry Christensen, Tracinda's attorney who filed the suit.
Shares of DaimlerChrysler's (DCX: Research, Estimates) American depositary receipts (ADRs) closed up $1.02 cents to $41.25 in trading Monday.
-- Reuters contributed to this report