Just What GM Needs

A passive investment? If history is any guide, Kirk Kerkorian's investment in the ailing auto maker is anything but

As if falling sales, weak stock price, and mounting losses didn't give General Motors (GM ) enough to worry about. Now Kirk Kerkorian, the billionaire agitator who tried to take over Chrysler (DCX ) in 1995, has come knocking.

Kerkorian said on May 4 that his investment firm, Beverly Hills (Calif.)-based Tracinda Corp., had snatched up 22 million shares in GM, a 4% stake. Moreover, it offered $31 a share -- a 13% premium over that morning's price -- to buy enough stock to boost Kerkorian's holdings in the struggling auto giant to nearly 9%.

By day's end, GM shares had soared 18% as investors jumped at the chance to ride Kerkorian's often profitable coattails. Given GM's market cap of just $15.7 billion before the tender offer was announced, most figure Kerkorian aims to gobble up a cheap stake and use his position to compel the auto maker to sell off noncore assets, cut costs, or restructure the bloated auto business far faster than current management appears inclined to do.

SHAKING THE TREE. Many figure his goal may be to force a sale of all or part of the General Motors Acceptance Corp. (GMAC) finance arm, which could potentially bring billions. Such moves, if successful, would go a long way to bolster GM's shares.

Kerkorian is also undoubtedly eyeing the $38.3 billion in cash that GM has stockpiled between the auto company and GMAC. If the past is any guide, some of that money could eventually end up in the hands of shareholders through a special dividend or a stock buyback.

Ultimately, Kerkorian may push to get one or more of his own people on the board to increase the pressure on GM Chairman and CEO G. Richard Wagoner Jr. to make such moves. But first, says a senior investment banker close to GM, Kerkorian will do everything possible to unlock value: "He's going to shake the tree to see what falls off."

QUIET -- AT FIRST. GM would not comment for this story. Terry Christensen, a lawyer for Tracinda, says it is simply making a "passive" investment because GM's shares are so undervalued. "They have great assets, great cash flow, and a lot of cash on hand," he says. "[GM] has major liabilities, but it also has a major bank account to solve some of those problems."

Yet Kerkorian, who over the years has held stakes in a range of companies and industries including MGM (MGM ), Chrysler, and Western Airlines, has made such claims before. Indeed, the dealmaker, now a robust 87, has a history of coming on soft and gentlemanly at first -- and then shaking things up if management doesn't make the moves he wants or succeed in boosting shareholder value.

Consider what happened in the 1990s, when Kerkorian bought a stake in then-ailing Chrysler. The dealmaker agitated for change but did so in a series of quiet conversations with then-CEO Robert Eaton, according to Kerkorian insiders. He even toured the Detroit auto show with the CEO, trying out the flashy new Viper sports car. "Kirk considers it dishonorable to be anything but courteous," says a longtime associate. "He treats people like he wants to be treated."

UNION ISSUES. Chrysler managed to reverse its fortunes, but the stock price eventually languished. After failing to convince management to buy back shares or pay out some of its $6 billion cash hoard as a dividend to boost shares, Kerkorian launched a $20.5 billion hostile takeover bid. In the end, Kerkorian couldn't raise the money to finance his bid. But by the time Daimler acquired Chrysler in 1998, he had made an estimated paper profit of $4.8 billion.

Thus many expect Kerkorian to move slowly, spending months quietly pushing management for change. Only if that tactic fails is he likely to publicly demand action. But just because Kerkorian is quiet, it doesn't mean nothing will happen. He could pressure GM to announce clearer plans to fix the car business.

GM lost $1.1 billion in the first quarter due to huge health-care costs for union workers and retirees and a sharp market-share slide. Wall Street analysts say that Wagoner's reluctance to release a detailed repair plan is a weight on the stock. Some are optimistic Kerkorian could push management into deeper cuts with the union. Says UBS Securities analyst Rob Hinchliffe: "It might force management to deal more directly with the union."

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