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When is a merger not really a merger? When it's a takeover disguised as a merger, billionaire Kirk Kerkorian would probably reply. The financier is suing DaimlerChrysler for more than $1-billion (U.S.) over the 1998 deal that created the German-American auto giant. Mr. Kerkorian says it was not the "merger of equals" Daimler pretended it was, but rather a takeover. This wolf-in-sheep's-clothing allegation is more than just semantics -- it could mean that Daimler underpaid for the U.S. company by as much as $10-billion.

This trans-Atlantic battle started more than three years ago, when Mr. Kerkorian and some other shareholders of the company launched their lawsuit. A similar class-action lawsuit launched by other Chrysler shareholders -- alleging that Daimler misrepresented the deal as a merger and seeking as much as $22-billion in compensation -- was settled in August with a payment of $300-million from the auto maker. But Mr. Kerkorian has resisted all efforts to settle his claim.

Is the 86-year-old financier, who owns the MGM movie studio and the MGM Grand casino in Las Vegas, playing the role of duped investor because he stands to make another billion or two if he wins? Perhaps. Mr. Kerkorian also has a long history with Chrysler, a company he has been the largest single shareholder of since 1990 -- and a company he launched a long and bitter takeover attempt for in 1995, worth about $23-billion.

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That ended in a stalemate, and Mr. Kerkorian signed a standstill agreement that prevented him from making (or taking part in) another takeover attempt for at least five years. He has said his lawsuit is about the "deceit and fraud" that Daimler engaged in with Chrysler.

Mr. Kerkorian filed his lawsuit less than a month after a now famous interview Juergen Schrempp gave to the Financial Times. The Daimler boss said that the deal was a takeover from the beginning, and that he had always intended to make the U.S. company a division of Daimler. "If I had gone and said Chrysler would be a division, everybody on their side would have said 'There's no way we'll do a deal,'" Mr. Schrempp said. "But it's precisely what I wanted to do." He said the deal was called a merger of equals "for psychological reasons."

Mr. Kerkorian may also be motivated by the fact that his stake in Chrysler has fallen in value substantially since the merger (or takeover) was completed. His 87 million shares were worth more than $7-billion on the first day of trading in the new entity, Oct. 21 1998, and at the stock's peak in January of the following year his stake was worth almost $10-billion. Those shares are now worth $3.6-billion. Even for a man such as Mr. Kerkorian, that's an awful lot of money.

Of course, an analysis by The Wall Street Journal during the takeover (or merger) process estimated that he had paid an estimated $1.2-billion for his 87 million share stake. When the deal was announced in May, 1998, Mr. Kerkorian's holdings were worth about $3.4-billion more than he paid for them. By that reckoning, he's still a lot farther ahead than he was when he bought his original Chrysler stake.

Although the case is still at the trial stage, DaimlerChrysler is arguing that the deal combining the two companies was widely known to be a takeover even though it was always referred to as a "merger of equals." And in fact, just a month after the deal was first announced, noted auto analyst Maryann Keller wrote in an automotive magazine that "for all the milder words used to describe this deal, like 'merger' and 'partnership,' this is a takeover of Chrysler."

In March, 1999, long before the Schrempp interview, a senior executive with DaimlerChrysler told the Washington Post that "We should never have called this a merger among equals... it was an acquisition, and by calling it something else we confused a lot of people." Another source said it was "an ego/political thing. Bob [Chrysler chairman Robert Eaton]didn't want Chrysler people to think that he was throwing in the towel, and Schrempp didn't want Washington to think that the Germans were taking over a company saved by American tax dollars." (Chrysler was rescued from certain doom in 1979 by a $1.5-billion loan package orchestrated by the U.S. government).

Apart from the patriotic sensitivities of the U.S. government -- which both Mr. Schrempp and Mr. Eaton lobbied heavily to support the deal -- there was another reason why the combination was structured as a merger of equals rather than a takeover, and that is the difference between the accounting and tax treatment of the two at the time. Until a change by the Financial Accounting Standards Board in the United States in 2001, mergers of equals were not required to book any premium paid for goodwill (the difference between the asset value of a company and the stock value), nor were they required to write it off.

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If Daimler had structured the deal as a takeover, it not only would have had to pay a much larger premium than it eventually did for Chrysler -- which is the substance of Mr. Kerkorian's claim for damages -- but it would have had to record the goodwill involved and then write it off, which would have had substantial tax implications for the company on what was initially a $93-billion deal.

Pride, politics, accounting -- all reasons why the deal was likely structured (and described) the way it was. And now it has become a multibillion-dollar headache for DaimlerChrysler.

E-mail Mathew Ingram at mingram@globeandmail.ca
For past columns and a brief biography, click here
Look for exclusive commentary by Mathew Ingram at GlobeInvestorGold
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