A Daredevil Wheel Deal

• Share

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.