Upping The Ante At GM
Kirk Kerkorian insists he's just a passive investor, but does he have a hidden agenda?
Corporate raiders and chief executives don't usually see eye to eye. But Kirk Kerkorian could end up doing General Motors CEO Rick Wagoner a big favor.
The billionaire financier surprised both Wall Street and GM last week when he offered to buy up to 28 million GM hares at $31 apiece--a 13 percent bump over the previous closing price. The purchase would increase the 87-year-old investor's GM holdings to nearly 9 percent, giving him enough clout to push for a seat on the board, agitate for management changes, and prompt a shake-up of the world's biggest automaker. That's been the modus operandi with other Kerkorian targets, such as Mirage Resorts, Metro-Goldwyn-Mayer, and Chrysler.
Like those companies before Kerkorian intervened, GM has become appetizing bait to bottom feeders, as its fortunes have sunk over the past year. The company lost $1.1 billion in the first quarter, because of sagging car sales, too many gas-guzzling SUV s, rebates averaging about $3,500 per vehicle, and runaway healthcare costs. Over the past year GM's stock price has fallen from $44 to $30. Last week, Standard & Poor's compounded the pain by reducing the company's debt rating to junk status, citing a brutally competitive market--and noting that the move had nothing to do with Kerkorian. The only bright spot has been General Motors Acceptance Corp., the firm's financing arm, which has prompted critics to gibe that GM has become a bank that gives away cars. GMAC may be Kerkorian's true focus, since spinning off all or part of the unit could bring him and other shareholders a tidy windfall.
Wagoner has insisted that GMAC isn't for sale, and he has been administering acute-care procedures since GM slashed its earnings guidance for 2005 two months ago. Now Wagoner and his team must also maneuver to keep the company intact and their reforms on track--and protect their own jobs, too. "We expect this to be a long, drawn-out battle," predicts Merrill Lynch analyst John Casesa.
Hard choices. Kerkorian and Wagoner may end up more allies than foes, however. Wagoner's to-do list includes a number of unsavory duties that would cow many CEO s: persuading, even forcing, 110,000 unionized employees to pay a lot more of their own medical care; usurping decision-making authority from independent fiefdoms inside GM; and cracking heads to bring more appealing cars to market faster. Kerkorian could be positioned as the bad cop, portending dire results if stubborn unions and division heads don't fall in line. "It's external ammunition for the changes GM has to make but that others have resisted," says Harvard Business School Prof. David Garvin. "The Kerkorian bid could be a very good thing for the company."
GM has become a poster child for the struggles of American manufacturers that can't compete with cheap imports and are saddled with huge retiree healthcare expenses and other "legacy" costs. Yet GM has made tremendous strides since it nearly declared bankruptcy in the early 1990s. The 52-year-old Wagoner, who began running GM's core North American operations in 1994 and became CEO in 2000, has overseen the refurbishing of several creaky GM production plants into world-class facilities. He pulled the plug on Oldsmobile, to help streamline GM's brand offerings. This year, Wagoner has taken purchasing authority away from regional bosses and centralized it in Detroit, and reappointed himself to his old job running North American operations, to cut a layer of decision-making. "GM is not one of those helpless cases," says David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. "Operationally, the core of the business is strong."
advertisement
