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GM's Board Holds the Cards


It may not come as a surprise that billionaire investor Kirk Kerkorian's radical proposal to shake things up at General Motors (GM) via a proposed alliance with Renault-Nissan hasn't been met with open arms at the U.S. auto maker. Amid all the media speculation and general industry navel-gazing about what a wily old fox Kerkorian is, how clever Nissan CEO Carlos Ghosn is, and the lousy shape of the American auto industry, GM senior executives have been keeping pretty quiet. To be sure, Kerkorian's proposal hit them like a Cadillac Escalade, so they need some time to regroup. If some of the early whispers carry weight, then GM won't easily sign on to this deal.

But GM is exploring the possibilities. Top management is looking at Renault and Nissan (NSANY) to see if a tie-up could help them compete, and some GM board members are at least intrigued. Unsurprisingly, there are some senior company executives who aren't sold on the idea of cutting a deal. Some say that a tie-up would be too intrusive and tough to manage. These same executives question whether the benefits being touted by Kerkorian's camp can be so easily had. Some analysts agree. "GM is in a mess," says longtime industry watcher Maryann Keller, a former Wall Street analyst who sits on the board of several auto-related companies. "But there is nothing that would happen from this tie-up that would help GM in the next year or two."

Be clear about one thing: GM's board will have the final say in this matter. If the company's directors, who will meet in a teleconference on July 7, agree to go ahead and explore a possible merger or alliance with Renault and Nissan, the company will do so. GM sources close to the situation say not to expect a revelation immediately after the teleconference. GM brass will need more time to weigh the pros and cons before making a recommendation.

WARY OF ALLIANCES. GM Vice-Chairman and Chief Financial Officer Frederick "Fritz" Henderson is in charge of exploring the tie-up and what it would do for GM, and he has a team of other executives each exploring whether there are strategic reasons to get in bed with Nissan and Renault.

Suffice to say that there isn't a lot of enthusiasm at the top floor of GM's headquarters in downtown Detroit. Sources say GM's embattled Chairman and Chief Executive G. Richard Wagoner Jr. has been calm and unflappable. But he has to see that a deal with Renault would threaten his position as the top man at GM. It could bring Ghosn and possibly one of his deputies to his board, which could add another vote or two to Kerkorian's Tracinda Corp. camp. Says UBS analyst Robert Hinchliffe: "Ghosn isn't the kind of guy to take a back seat."

Already some GM executives are whispering that they don't see a deal with Renault as being all that helpful to their situation. "Our main objective is to keep our eye on the ball and getting the turnaround done," says one GM executive. "These things can take your eye off the ball."

First, says one executive, GM just exited or at least diluted its interest in a bevy of lousy alliances with the likes of Fiat Auto (FIA), Isuzu Motors, Suzuki Motors, and Subaru parent Fuji Heavy Industries. GM did get engines and even some vehicles from those tie-ups, but by and large most of those deals were losers. GM may argue that a deal with Renault-Nissan is just a new twist on a bad strategy.

THE CORE ISSUES. Another argument coming from inside GM is that sharing parts and engineering with Renault—while it could yield savings—won't help GM with some of its biggest problems. GM insiders say that Renault can't help the long-suffering auto giant reduce its massive burden of retiree costs; polish up weak brands like Saab, Pontiac, and Buick; or quickly boost its fortunes in passenger cars. Nor would it help GM boost revenue per vehicle.

Even people close to Tracinda anticipate that GM will start to weave a story that Wagoner already has done a lot of heavy lifting and, with the turnaround strategy in place, management doesn't necessarily need a tie-up.

Tracinda is prepared for that argument. Sources close to the investment firm say that while Wagoner has stepped up his restructuring plan, his overall tenure as GM boss has been weak. He waited too long to address spiraling health-care costs, weak brands, runaway incentive spending, lost market share, and the company's long-bloated chain of assembly plants.

And he didn't get into crisis mode until the company was in the process of burning through more than $6 billion in cash and en route to losing $10.6 billion. They would like to at least get Ghosn's involvement on the board to get some of his input in turning the company around. "Ghosn may do the same things, but he might do them faster," says John A. Casesa, analyst with Casesa Shapiro in New York.

JUDGMENT ON CEO. GM insiders point to a few other things that need to be explored. For starters, GM's stock is still a cheap buy right now. Selling Renault a 20% stake for $3 billion might be making a deal at too low of a price. Also, since GM would probably issue new shares, it would dilute the holdings of the remaining stockholders. So GM needs to make sure any deal creates value.

Not surprisingly, Kerkorian's camp thinks a deal with Renault will add value. They say the synergies of auto-making would help GM compete. And more to the point, they think Ghosn's presence will either help them spark management to faster action, or replace the Wagoner regime altogether if it doesn't.

The will of GM's board is vital. Renault's board of directors said on July 3 that discussions could start "if General Motors Corp. makes the proposal." Some of its shareholders—including the French government—are leery of the tie-up. That means GM could let this idea die in committee if they want.

The debate all boils down to this: If the board agrees to a tie-up, then GM directors are essentially voting that Wagoner has had enough time to show that he is the one to usher in a new and prosperous era for GM. And it's time to try something else.


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