AUBURN HILLS, Mich. -- Chrysler Corp. is reissuing up to 24 million of its shares and contributing them to its pension fund.
Chrysler is believed to be the first company to use this technique to clean up its balance sheet prior to a merger, and other companies are expected to follow its lead.
The shares being contributed to the fund are considered "tainted" because they were bought back by the company in a share buyback program two years prior to the announcement of Chrysler's merger with Daimler-Benz AG.
The stock must be cleared from the company's balance sheet so the pooling-of-interest accounting method can be used in the merger.
Between 23 million and 24 million shares, valued at about $1.1 billion as of Oct. 29 will be reissued and contributed into the $17 billion Chrysler Corp. Master Retirement Trust and the $1.5 billion (U.S.) Chrysler Canada Ltd. Pension Fund.
Under Financial Accounting Standards Board rules, mergers cannot be accounted for as pooling of interests when corporate coffers contain 10% or more of their own shares. Most companies, however, sell reissued stock in the open market.
The Chrysler method saves the new company -- DaimlerChrysler -- millions of dollars and helps to preserve its earnings per share.
The move also allows Chrysler to reissue the shares without jeopardizing its share price in today's volatile market. In fact, some analysts said the pension fund's purchase could boost the stock price.
Bob Willens, tax and accounting analyst at Lehman Brothers Inc. in New York, said the pension fund stock purchase is a "perfect strategy" that left many wishing they would have thought of it.
Mr. Willens said he expects Chrysler's stock price will be boosted, since investors' worries of Chrysler stock flooding the market will be remedied.
New York-based Merrill Lynch Global Securities auto analyst Nick Lobaccaro agrees that the move is a good one. Auto sector stocks have been trading lower, and the fact that the company has been removed from the Standard & Poor's 500 stock index would make it even more difficult for Chrysler to have additional shares in the market, he said.
With the newest stock contribution, company securities account for about 7% of Chrysler's U.S. pension assets.
According to the prospectus, Chrysler's pension funds owned another 2.1 million shares of company stock as of Dec. 31, 1997.
The Employee Retirement Income Security Act prohibits corporate pension funds from holding employer securities totaling more than 10% of the fund.
Chrysler executives already have picked four of its largest existing money managers to whom to allocate the contributed shares, according to a source familiar with the fund.
The deal is expected to be finalized by mid-November. Chrysler pension executives would not release the managers' names.
The outside firms will have complete investment discretion in managing the stock, said Chrysler spokeswoman P.Y. Rockingham. There will be no restrictions on how long the stock can be held or when it may be sold.
Meanwhile, the pension fund is not as well-funded as it was in the past. With lower stock market returns and lower interest rates, pension funding will be an issue for Chrysler, Mr. Lobaccaro added.
The discount rate for Chrysler's U.S. plans decreased to 6.75% in 1997 from 7.25% in 1996 and is expected to result in a $38 million increase in 1998 pension expense, according to the prospectus for the stock offering. Chrysler's contributions have decreased to $74 million in 1997 from $941 million in 1996 and $838 million in 1995.
Chrysler chose to contribute the reissued stock to its pension plan to ensure the plan is adequately funded, according to Ms. Rockingham, the company spokeswoman.
"We are very happy to have the stock and we see it as a good long-term investment," Ms. Rockingham added.
Chrysler's accumulated benefit obligation as of Dec. 31, 1997, was $16.3 billion, according to the prospectus for the stock offering. A year earlier, its ABO was $15.1 billion.
The reissuing of stock to the pension fund was approved at Chrysler's last board of directors meeting earlier this year. Soon after, Ms. Rockingham said, the pension fund committee approved it. She declined to give specific dates of these meetings.