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."
The problem is that competitors like Toyota and Honda have been improving even faster, and Wagoner is a realist about GM's challenges. The former Duke University basketball player, whom colleagues liken more to a coach than a boss, has tried to remain publicly upbeat about GM's prospects. But when one analyst met with him recently and asked how business was going, Wagoner was blunt. "Things suck," he snapped. GM faces the biggest healthcare burden of any company in the world--a sum that adds about $1,500 to the cost of every car GM builds--and unions that negotiated a generous contract in 2003 requiring them to pay only 7 percent of their healthcare costs. GM says its salaried workers pay 27 percent, and it would like the unions to bear a similar burden. "The sooner, the better," says Chief Financial Officer John Devine. So far the unions haven't budged, which suggests a big battle when the contract is renegotiated in 2007.
Most analysts agree that GM needs to shrink, by closing plants, reducing redundancies in its car and truck lineups, and perhaps axing Buick or Pontiac--options that Wagoner and his team have been discussing for months. Those challenges fit the Kerkorian profile. The Las Vegas tycoon is an eighth-grade dropout who became one of the world's richest men by betting correctly on ailing companies poised for a rebound. When he bought the movie studio MGM in 1996, it had been losing money for half a decade. Within three years, MGM had ridden the Internet media boom back to profitability and even begun purchasing other firms. Kerkorian earned more than $1.7 billion when he sold the studio to Sony in 2004.
Kerkorian is not a passive investor, however. After buying MGM, he installed his own team of executives to run it his way. Many in Detroit recall Kerkorian's 1995 effort to take over Chrysler, and the bitter battle with CEO Robert Eaton that followed. Kerkorian ultimately failed to muster the financing for the deal, but the 14 percent stake he held in the company gave him enough leverage to claim a board seat for a hand-picked disciple and force other actions that raised returns for shareholders. Kerkorian's approval was needed for the 1998 merger that created DaimlerChrysler, which he later changed his mind about and is litigating with Chrysler's new owners.
Cash cow. Kerkorian says his GM holdings are simply an investment, but Wall Street thinks he has something in mind besides waiting for the stock to gather steam. GMAC, the company's crown jewel, could earn $2.5 billion in profits this year, while automotive operations may lose that much or more. And about half of GMAC's value comes from home mortgages and insurance, which could be spun off for billions without any impact on the company's ability to finance cars. There's cash in the coffers, too. GM's automotive and finance arms are each sitting on close to $20 billion, which GM would like to help absorb shocks during the bumpy ride of the next two years. But Kerkorian could push for using some of that hoard to buy back shares or otherwise reward investors.
Then there's the chance that a savvy billionaire simply has more confidence in GM's ability to turn itself around than other investors have. While the company's glory days may have faded to black, GM still boasts engineering talent on four continents and some of the world's most recognizable brands. And there have been small victories. Cadillac sales have nearly drawn even with BMW's. Small SUV s like the Chevy Equinox have been stealing market share. "We can do it too," insists Mark LaNeve, GM's top North American marketing executive. "And we feel a lot of urgency to start putting points on the board." If not, some of the players may start to get yanked from the game.
This story appears in the May 16, 2005 print edition of U.S. News & World Report.