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July 5, 2006

Kerkorian's deal for GM

gm15.gifKirk Kerkorian's proposed deal to save General Motors came up just before the holiday weekend, so analysis of the proposal has been sparse to date (previous posts on GM's Enronesque experience are here). Last Friday, Kerkorian's Tracinda Corp. -- the largest individual shareholder in GM -- publicly proposed that GM become the third wheel in an automotive alliance with Nissan and Renault, both of which would buy substantial minority stakes in GM. Nissan and Renault are led by Carlos Ghosn, whose revival of Nissan six years ago has made him the most influential automotive CEO in the world. Interestingly, Kerkorian's salvo was deftly timed to coincide with the Big Three automaker's June sales reports, which were dismal.

As GM's stock rose nearly 10% after Kerkorian's announcement, GM's directors convened an emergency meeting while grumbling that they didn't appreciate negotiating in public, although they announced after the meeting that they would consider the proposal (imagine the lawsuits if they didn't?). Nissan and Renault's boards kept up the heat on Monday by announcing that they would entertain an alliance if GM agrees. Such an alliance would leave the weak and struggling Ford Motor Co. as the only independent American automaker.

The WSJ's Holman Jenkins ($) sizes up Kerkorian's strategy and suggests "the possibility that Mr. Kerkorian is simply lining up a lifesaver in the event of a sudden auto recession that some see looming. GM likely would not survive a sharp drop in SUV and pickup sales right now." Regardless of whether that's the underlying reason for Kerkorian's proposal, Jenkins observes that Kervokian's message is clearly "there's not enough change going on around here. Give me more change."

Kerkorian's concerns about GM's management have merit. Although GM posted a small profit in the first quarter of 2006 on the heels of its gargantuan $10.6 billion loss last year, the profit was primarily the result of an accounting change. Cash flow remains negative and the company's debt remains in the deep junk category. This lackluster performance comes amidst a larger backdrop of GM's poor performance over the past six years. Since earning a record $5.7 billion in 1999 and having its stock top out at $70 a share in June 2000, GM's stock has declined by over 70% since then to below $19 per share at the end of last year, although it has recovered to $29 per share on the early success of current GM CEO Rick Wagoner's reorganization plan and now Kerkorian's proposal. Perhaps most importantly, however, GM's U.S. market share has plummeted to 24.4% from almost 30% in 1999. Twenty years ago, GM's share was 41%.

Looking at all this, Jeff Matthews has the most entertaining analysis of Kerkorian's strategy to date, analogizing GM's choice to the one faced by Sonny Corleone in The Godfather if it turned out that Don Corleone did not survive after being severely injured in Sollozo's assassination attempt. As Matthews notes, brother Michael's plan ended up being a better alternative for Sonny than making a deal with Sollozo, there is no Michael Corleone for GM.

Posted by Tom at July 5, 2006 5:29 AM |


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