KK vs. Daimler Case Becomes Noteworthy - A merger of Equals?

WILMINGTON, Del. December 22, 2003; Peg Brickley writing for Dow Jones reported that the prospect of a takeover by Germany's Daimler- Benz AG worried top executives at Chrysler Corp. almost from the start of the merger talks that led to the 1998 combination that created DaimlerChrysler AG , according to notes revealed Monday in Kirk Kerkorian's lawsuit against the German automaker.

Sixty-one pages of notes, mostly handwritten records of deal negotiations, appear to bear out at least some of Kerkorian's allegations that investors were duped into backing the deal on the understanding it would be a "merger of equals" instead of a takeover.

The documents are the focus of a special hearing in the Kerkorian case, ordered by U.S. District Judge Joseph Farnan to probe why what appear to be critical documents turned up so late in the case. DaimlerChrysler gave the notes to Kerkorian's lawyers near midnight on Dec. 15, with only two days left in the trial.

Monday, an attorney for DaimlerChrysler's outside law firm blamed outside vendors for mishandling the notes, which were handed over in binders by former Chrysler Chief Financial Officer Gary Valade, but which disappeared at some point in the process of preparing for the trial.

Lee Kuck, a partner at Skadden Arps Slate Meagher & Flom, said the firm's investigation suggested the key documents went astray while in the hands of two different outside vendors.

Attorneys for Kerkorian said the 61 pages - with another seven pages that have turned up since last week - disappeared from the discovery process in a suspicious fashion.

The trial of the Kerkorian case is expected to resume in January, after the issue of what happened to the Chrysler executives' deal notes is resolved at the hearing before Special Master Collins J. Seitz. The notes themselves, though still unexplained, reveal that politics and psychology, as well as price, were high on the agenda in deal talks that focused on the idea of a merger of equals.

Kerkorian's lawsuit asks more than $1 billion in damages - the difference, Kerkorian claims, between the price Chrysler commanded in a merger, and the price he would have received, had the deal been revealed as a takeover.

"MOE (merger of equals) is very important to us and we know it will result in some Economic Pain, but we will pay for certainty," says a boxed entry on one page, which appears to be Valade's notes of - or script for - a phone conversation with Daimler-Benz's Eckhard Cordes in March 1998.

Valade took the stand briefly Monday, long enough to say he had "no idea" why critical deal notes he handed over to DaimlerChrysler's lawyers did not surface until late in the trial of the case.

Seitz refused to let Valade testify about the substance of the notes, which were put on the public record in raw form.

What they appear to reveal, however, is a different picture from that presented by former Chrysler executives who testified in the trial that Chrysler got what it bargained for, a merger of equals, at a fair price.

Besides Valade's notes, there are notes from former Chief Executive Robert J. Eaton, which say he wanted a U.S. incorporation for the post-merger company, and a "U.S. Board." Eaton, Valade's notes say, was "deeply troubled about structure" issues in the merger talks.

DaimlerChrysler is a German AG, at the insistence of Daimler-Benz Chief Executive Juergen Schrempp. According to Valade's notes, Schrempp said Daimler- Benz's "political problems of being Non-German greater than yours being non- American."

The term "merger of equals" has been central to the trial, and executives have testified it was more of a philosophical stance or device to reduce internal politicking at the post-merger companies, than a principle that called for a certain management structure or price.

But an "MOE" chart specifies a "50/50" split of seats on the management board that runs the operational side of DaimlerChrysler, as well as an even split of seats on the supervisory board.

In the margin of notes Valade wrote in April 1998, he appears to speculate on the name for the new company being created. Chrysler-Daimler "rolls off the tongue," Valade wrote.

Instead, the company is DaimlerChrysler. And Valade is one of only two former Chrysler executives remaining on a management board that once had eight executives from the Michigan company. He is due to retire at the end of the year.

"What's in the documents is a bombshell," said Terry Christensen, attorney for Kerkorian, in an interview after the hearing on the late-revealed notes.

Much of the material in Valade's files is inconsistent with the testimony of Chrysler executives, he said. Christensen has asked Farnan to keep Valade from testifying and let the documents stand as evidence of the state of mind of executives at the deal table.

The attorney said the notes reveal Chrysler executives were concerned about selling the idea of a merger of equals.

"They were frankly trading cosmetics for money and they were very worried that someone might perceive it as an acquisition," Christensen said.