DEAL WATCH: OH LORD, WON’T YOU BUY ME A MERCEDES DODGE . . . PLIGHT FOR VALUE FUNDS AS CHRYSLER STOCK SURGES ON $38B DAIMLER-BENZ DEAL

It’s been said the perfect car is styled by Chrysler, engineered by Mercedes and built by Toyota.

Well, two out of three ain’t bad.

With last week’s announcement of a $38 billion stock swap proposal with Germany’s Daimler-Benz AG, Chrysler Corp., the darling of value investors, may be speeding past the target prices many had set for its stock.

Chrysler is not the only auto-related stock buoyed by merger mania. Last Friday, Britain’s Vickers PLC announced it had accepted a $710 million bid from Volkswagen AG for its Rolls-Royce Motor Cars, just a week after insisting it would sell the unit to Germany’s Bayerische Motoren Werke AG for a lower price.

And one of the world’s largest auto suppliers is being formed with last week’s news that Dana Corp. agreed to acquire Eichlin Inc. in a $3.4 billion stock deal that beats — for now — a hostile bid for Eichlin by SPX Corp.

stock valued at $53 to $70

Value managers usually sell when stocks exceed their price targets, but many say they’re waiting for answers to merger-related questions, from the likely cost savings to organized labor’s reaction.

Chrysler stock, which value managers reckon is worth between $53 and $70 a share, zoomed after the merger news last week to more than $53 from about $41.50. That compares with a 52-week low of $30.88.

But managers point out nothing’s changed insofar as what drew them to the stock — from Chrysler’s design edge to its cash hoard.

“It’s very close to our target price,” says Clyde McGregor, portfolio manager for the Chicago-based Oakmark Equity and Income Fund. Before the merger announcement, that target was $55.

As of late last week, the $56 million fund had 4.8% of its assets invested in Chrysler, the highest of any equity mutual fund, according to fund researcher Morningstar Inc. Mr. McGregor says has no immediate plans to sell his fund’s stake, but “if (the stock price) had gotten that way organically, I think maybe it would be time to take the position down.”

Some details he wants to examine: melding of corporate cultures and resolving of union issues.

Mr. McGregor isn’t the only one watching closely.

According to Morningstar data, 17 of the 25 equity funds with the largest stake in Chrysler (by percent of net assets) are value funds, including Legg Mason Total Return and Warburg Pincus Growth and Income.

Chrysler shares make up 2.6% of the USAA Income Stock Fund’s $2.6 billion portfolio.

“The analysis is still going on,” says Lon West, an analyst for the fund in San Antonio, Texas. “I can’t say how we’re going to react. The unions could play a part; they don’t have veto power over the deal, but they could throw a monkey wrench in it.”

Even long-time Chrysler champion Seth Glickenhaus of New York-based Glickenhaus & Co. is hinting that he might begin to cash out his clients’ 8 million shares.

reduced costs, raised dividend

“If the market is where it is trading now and the deal is synergistic and I think we get a fair shake, it’s possible we’ll hold on,” says Mr. Glickenhaus, whose firm manages $5 billion. “If the market is higher and it looks vulnerable, I don’t know.”

But financial adviser Stewart Koesten, of Kansas City, Mo.-based Koesten Hirschmann & Crabtree Inc., says he’s surprised that, as of last week, Chrysler’s stock hasn’t raced even higher.

“I think there’s enormous market potential for Chrysler,” says Mr. Koesten, whose six-month-old firm manages $15 million, “even if Chrysler does no more than capture the European taxi market.”

For his part, Mr. Glickenhaus maintains that the stock has been a deal for years. “This company is the outstanding bargain of all the stocks on the Big Board,” Mr. Glickenhaus says.

Chrysler, he says, is the most efficient auto manufacturer in the world, with the possible exception of Toyota Motor Corp.

“They’ve reduced costs and raised their dividend five times in a period of a few years,” he explains. “They also bought back 24% of their stock and they still have $7.5 billion in cash.”

It was Chrysler’s healthy dividend that drew Oakmark’s Mr. McGregor to take a stake in July. The introduction of new products, like the LH sedans, and the Durango sports utility vehicle sweetened the pot.

“We thought we had a good deal with the new products,” Mr. McGregor says, “but now it turns out we got a possible merger for free.”