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Kerkorian could be GM's wake-up call
The influential investor's offer for a bigger stake in the automaker at least set a floor for the stock. It also might force management to actually change the company.
By Robert Walberg
News that billionaire investor Kirk Kerkorian's Tracinda Corp. offered to pay roughly $870 million to acquire an additional 5% stake in General Motors (GM, news, msgs) sent the stock of the beleaguered auto maker racing to its biggest one-day gain in over 20 years. Given Kerkorian's long track record of unleashing value, and considering the scope of Wednesday's gain in GMs stock, does the news signal a bottom for GM's stock? In a word, yes.
No, Kerkorian's investment doesn't change the fact that GM is faced with high health care costs, rising raw materials costs, declining market share, stagnant product lines and a lousy credit rating that Standard & Poors cut to junk status Thursday. But in launching a tender offer rather than simply acquiring the stock in the open market, Kerkorian sent a strong signal to management that it must take more aggressive action in righting the ship, or face the consequences from increasingly hostile shareholders.
Don't forget that Tracinda already owned 3.9% of GM at an average price of $26.33 per share. Odds are Kerkorian hasn't been all that happy watching the stock's value decline by nearly 55% over the last 18 months. It's also very unlikely that he was appeased by management's recent plan to reverse the company's fortunes, a plan that relies heavily on improved marketing of its cars and trucks.
The real problem
A lack of marketing isn't GM's biggest problem. Unappealing designs, too many lines, copycat styling across lines and a relatively high cost structure are the big structural problems management seemed unwilling, or unable, to address. Well, the heat is on now; management will have to address these issues quickly or face the potential of some ugly board fights down the road.
Lest we think Kerkorian's investment is all about the auto business, note that GM's financing arm, GMAC, has been the big driver of income over the past few years. In 2004, the financing unit accounted for roughly 78% of the $3.7 billion earned by GM. The automaker expects GMAC to post net income of about $2.5 billion this year. Clearly, one of Kerkorian's aims is to unleash the value of this unit.
How GM would go about separating the non-auto financing businesses from the rest of the company remains to be seen, but today's action will almost certainly accelerate the process. According to a research note by Merrill Lynch analyst John Casesa, the value of these non-core assets is about $25 per share.
Worth more than few bucks
If true, then the auto and auto financing parts of the business were being valued by the market at zero last month when the stock briefly dipped below the $25 level. I'm no big fan of the way GM is handling its auto business (see "GM's woes are just beginning" and "GM's best offense could be defense"), but there's no question it's worth more than a few bucks per share.
Maybe that's why Kerkorian stepped in and made his move now. Of course, it didn't hurt that the stock was being shorted heavily by investors turned off by the recent quarterly loss ($1.1 billion) and the 7.7% decline in April sales. In hearing Wednesday's announcement by Tracinda, short-sellers scrambled to cover their positions, thereby stoking the flames of the historic rally. In the process, the 22 million shares already owned by Kerkorian just increased in value by approximately $97 million -- not a bad day's work.
But let's not be so cynical. Assuming Kerkorian is in this for the long haul and that he truly wants to enhance shareholder value, then it's probably safe to assume that the $31 offer price of the tender should be close to the stock's new floor.
Yet don't mistake an improved outlook for the stock for an improved outlook for the company. As I've written, GM still faces some major near-term obstacles, including the possibility of its credit rating being slashed, which would increase its financing costs.
Finally, a sign
Nevertheless, what investors have been longing for is some sign, any sign, that management would adopt something other than the usual marketing/design/cost-cutting plan to fix the problems. Kerkorian's investment is just that sign. GM management is now on notice -- act aggressively or prepare for a fight over control of the company.
There might not be much additional upside in the stock over the short term, at least not until investors get a better sense of how management plans to improve operations and enhance shareholder value. But the downside risk has been significantly reduced by the Kerkorian news. In fact, the news cycle for GM has just gone from miserable to positive. We all know the negatives. Now we're faced with the potential for some good news for a change, and that's very, very good news for long suffering shareholders.
At the time of publication, Robert Walberg neither owned nor controlled shares in any equities mentioned in this column.
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