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Kerkorian At The Gates


When General Motors Corp (). detailed elements of its restructuring plan on Oct. 17, few were watching as closely as investor Kirk Kerkorian. Ever since the corporate agitator went public with his plans to buy nearly 10% of GM stock in May, investors have welcomed his presence as a powerful agent for change at a company that appears to be moving too slowly to fix its myriad problems. They also viewed his September filing, which expressed interest in a board seat, as a sign that he planned to become decidedly more activist.

Now, thanks to a major concession from the United Auto Workers, GM Chairman and Chief Executive G. Richard Wagoner Jr. has come up with $1 billion a year in health-care savings. But that alone won't keep Kerkorian at bay. Analysts and sources close to his Tracinda Corp. investment firm say he will want to see a more detailed restructuring plan, which Wagoner won't divulge until December. And even then, the billionaire and his lieutenants may push for a stronger course of action if they don't believe GM will become profitable in the medium term. "I don't think this changes Kerkorian's game plan," says Joseph S. Phillippi, president of consulting firm AutoTrends and a former Wall Street analyst. "GM has a lot more to do."

The question now is how Kerkorian will exert pressure on GM. He could demand a board seat and try to put his imprint on GM's restructuring plan. Indeed, ever since Kerkorian began amassing stock in May, speculation has been rife that the 87-year-old raider would force GM to make his trusted deputy, former Chrysler Corp (). and IBM () Chief Financial Officer Jerome B. York, a director.

But grabbing a board seat poses dangers. For one thing, Kerkorian would be exposed to shareholder lawsuits if his actions were seen as harmful to GM. "In the post-Enron era, being a director comes with a certain amount of risk," says Robert J. Guiffra Jr., a partner with Sullivan & Cromwell. "He could be viewed as a part of the problem, not the solution."

What's more, taking a seat on the board would entangle Kerkorian in the company's restrictions on insider trades. GM's rules prohibit board members from selling stock during their service except when they are exercising options. And, with York on the board, Kerkorian also would have to adhere to U.S. securities laws that state he may buy or sell only during certain periods. All of the above would make it tougher for Kerkorian to liquidate his investment in the auto maker. "You have a much greater range of action if you're an outsider," says Guiffra.

MOUNTAIN OF CASH

So what might Kerkorian do instead of using the board to push his agenda? Acquiring more stock might get him the results he wants faster than waiting for a wholesale restructuring to materialize. That in turn would give him more voting shares; such clout could convince big GM shareholders such as Capital Research & Management and Southeastern Capital to join the Kerkorian camp, says Phillippi. Those three shareholders would have a 32% combined stake. "These investors bought stock based on a belief that a turnaround is in the offing," Phillippi says. "If something doesn't happen, I could see some siding with Kerkorian."

Then, presumably, Kerkorian would pressure management into using its mountain of cash to fund a major restructuring, buy back stock, or pay him to go away. After all, despite its problems, GM has $19 billion in cash. And that hoard could get a lot bigger if Wagoner sells a majority stake in the hugely profitable General Motors Acceptance Corp. lending arm as he said he might on Oct. 17. Offloading 60% of GMAC would bring in about $12 billion in cash, says Sanford C. Bernstein & Co. analyst Brian Johnson.

A Kerkorian proxy could still end up on GM's board. That would be more likely if Wagoner's restructuring steps -- closing plants, reviving the vehicle lineup, winning more union concessions -- don't go as far as Kerkorian is expecting. If Wagoner doesn't deliver a credible plan by the end of the year, look out.

By David Welch in Detroit


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