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Just What GM Needs


As if falling sales, weak stock price, and mounting losses didn't give General Motors Corp. enough to worry about. Now Kirk Kerkorian, the billionaire agitator who tried to take over Chrysler Corp. 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. 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.

SHAKING THE TREE

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."

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, 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 Corp. 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."

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 (UBS) analyst Rob Hinchliffe: "It might force management to deal more directly with the union."

Wagoner is already talking to the United Auto Workers about cutting health-care costs and production. But many on Wall Street think GM needs to start downsizing, and fast. Kerkorian could become management's new gadfly, demanding plant closings and other cuts that could boost GM's operating performance, says Joseph S. Phillippi, president of AutoTrends Consulting: "If he could force management to restructure the company, it would pay big dividends."

But that may not be the only -- or even the main -- focus of Kerkorian's second foray into Detroit. GM has $19.8 billion in cash in its auto business and another $18.5 billion in GMAC. Merrill Lynch & Co. analyst John A. Casesa says the auto maker could sell its GMAC mortgage and insurance businesses for billions. The same day Kerkorian made his move, GM put its residential mortgage business under a separate holding company, which would make it easier to spin off. Kohlberg Kravis Roberts & Co., a New York private equity firm, is also looking at the commercial mortgage business, say bankers. KKR declined to comment. Moreover, GM owns 20% each of Suzuki Motor Corp. (SZKMF) and Subaru parent Fuji Heavy Industries Ltd. (FUJHY), both of Japan.

BREAKUP AHEAD?

Could Kerkorian or another investor try to take over GM and cause such a breakup? For now that looks unlikely. Private equity firms have been sniffing around but are mostly interested in picking off what they can from the financing operations. Besides, the costs of fixing GM would be prohibitive, say bankers. It will take tens of billions of dollars to shrink GM's auto-making business to a profitable level. Even if that happens, GM has $57 billion in unfunded health-care liabilities.

Instead, most expect Kerkorian to grab a big enough stake to make his voice heard, a move that could lead him to try to gain seats on the board. Given Kerkorian's track record, his presence alone may be enough to get GM more focused on restructuring. While that could be disruptive, some execs say Wagoner might actually welcome the threat of someone like Kerkorian as a way to win support for more massive change. Says one GM insider: "Rick could use the cover to make some of the difficult decisions that we need to make." Who knows? Kerkorian could end up lending Wagoner a hand.

By David Welch in Detroit, with Ronald Grover in Los Angeles and Emily Thornton in New York


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