A Squeeze Play at GM
Is an alliance with Nissan and Renault on deck?
There's been a lot of talk about how little power most shareholders have over America's CEOs. But sometimes shareholders, and what they want, matter quite a lot. Witness billionaire investor Kirk Kerkorian's recent muscle flexing at GM.
For more than a year Kerkorian, 89, has pushed the distressed American automaker to cut costs and prodded it to increase profits. He has threatened the primacy of its CEO, Rick Wagoner, and installed his own man, Jerome York, on the company's board.
But the proof of Kerkorian's prowess at GM became crystal clear last week, when the company said it would investigate the benefit of joining an existing alliance between Japan's Nissan and France's Renault, two companies that share a CEO in Carlos Ghosn. The move would further shake up the auto industry, while possibly giving ailing GM a needed cash infusion and access to new markets.
However, the most startling bit of the equation is who structured it, as joining the alliance wasn't Wagoner's idea. In fact, GM wasn't even at the table when its inclusion was discussed. Instead, Kerkorian delivered the news after talking with Ghosn. It is unlikely Wagoner was pleased.
Gerald Meyers, the former chairman and CEO of American Motors Corp., notes that GM is in the midst of a turnaround "that is just starting to show some traction." Meyers, now a professor at the University of Michigan's Ross Business School, says, "GM is in crisis. It is a terrible distraction for management to face what amounts to a hostile takeover."
The letter to Wagoner from Kerkorian's investment company, Tracinda Corp., states simply that Nissan and Renault are "receptive" to the idea of combining forces with GM and that in such an alliance, GM could "realize substantial synergies and cost savings."
Not all analysts agree with that assessment. Yes, the deal signals that others see value being squeezed out of GM's laborious restructuring. Also, there are bright spots, such as GM's dominance in the American light-truck market. But the fabled synergies would come later, if at all.
Big is not necessarily better in the auto industry. The combination of Daimler-Benz with Chrysler added to the combined company's headaches instead of decreasing them. While GM would be stopping short of a merger in this case, experts note that the company hasn't shown itself adept at dealing with its own complex structure, so it would be unlikely to flourish with one even more expansive.
Long shot. "Often the diseconomies of scale are larger than the economies," notes Ulrich Steger, a professor at the International Institute for Management Development in Lausanne, Switzerland. He adds that the alliance being proposed for GM seems to be a long shot, because Renault-Nissan would probably gain nothing "but be burdened with a huge partner in permanent decline." Adds Steger: "Ghosn might be an imperial CEO, but he's definitely not stupid."
Whether or not Ghosn really wants to take on GM's problems, the idea of it could do wonders for Kerkorian's 9.9 percent stake in the carmaker. The company's stock price, which rose on the news of the possible alliance, has been down about 10 percent since May 2005, when Kerkorian first acknowledged acquiring a large stake. Meanwhile, Nissan's stock price has risen strongly since Ghosn, known as an innovative turnaround specialist and cost cutter, took the helm in 1999.
Automobile industry experts say that Kerkorian's bid is at least another shot across Wagoner's bow, reflective of the type of bold leadership Kerkorian would like at GM. Wagoner has been cutting costs--recently pushing for more than 30,000 buyouts of hourly workers--and has added to GM's coffers by selling off many profitable but noncore businesses. Yet he has been unable to steady the company, which has been battered by both more nimble competition and rumors of bankruptcy.
"Kerkorian is a value investor who pioneered the activist approach of shake the tree to get some fruit," says Karel Williams, an automobile industry expert and professor at the University of Manchester. "This suggestion about Renault is only the opening move."
This story appears in the July 17, 2006 print edition of U.S. News & World Report.
advertisement
