89-year old Kirk Kerkorian has done it again. The question is, what is "it"? Questions are swirling about the legitimacy of Kerkorian wanting to merge Nissan/Renault with General Motors to create a mogul that would own 22 percent of global production. There are many other questions on the table as we look at the legitimacy of this merger. The one no can answer at this point is, what will Kerkorian do if General Motors doesn’t give him the result he wants; will he sell his stock and, if he did, what effect would it have on General Motors?
Kerkorian has been called everything from shrewd to an active non-conformist investor. Where as Warren Buffet is known as someone who buys a good deal and works with the company, Kerkorian is obviously someone who likes to take his case to the public to put pressure on the company from outside in. Kerkorian is best known in the automotive world for trying to take over DaimlerChrysler (DCX), eventually settling for what he thought was a "merger of equals" and then suing DCX when the German parent company actually took ownership of the companies. He has now set his sights on General Motors, a company that is nine years older than Kerkorian.
According to a USA Today article Kerkorian bought a controlling stake in MGM from Edgar Bronfman Sr. for $82 million in 1969, and then Kerkorian sold MGM twice: first to Turner, for $1.5 billion in 1986; and then to Italian mogul Carlo Paretti, for $1.4 billion in 1990. He bought the studio back twice at bargain prices.
Mr. Kerkorian, through Tracinda corporation, filed a SC13D with the Security Exchange Commission (SEC) in which he list ownership of 56 million shares General Motors common stock shares representing 9.9 percent. Tracinda attached two letters to the filing; one to Rick Wagoner, CEO of General Motors stating that Renault and Nissan "are receptive to the concept of including General Motors Corporation in their partnership-alliance and purchasing from General Motors a significant minority interest in the Company." The letter goes on to say that "the Renault-Nissan partnership -alliance has created tremendous engineering, manufacturing and marketing synergies, resulting in substantial benefit’s and cost savings to both Renault and Nissan." The letter was cc’d to all General Motors board members, including Tracinda’s Jerry York.
The second letter was to Louis Schweitzer, Chairman of the Board of Directors, Renault S.A., and Carlos Ghosn, Chairman of the Board of Directors, Nissan Motor Company, Ltd. that basically said he had sent the letter to Wagoner and that Tracinda believes that a global alliance has the potential to materially strengthen the competitive positions of all three companies, with the attendant benefit’s accruing to each company and it’s respective employees and shareholders.
If only it were that easy, we could all go home and let the three companies own 22 percent of the global marketshare, twice as much as Toyota. It’s interesting that at the same time Toyota is looking like it could surpass General Motors in marketshare people are talking about this alliance being worth 22 percent of the global marketshare. General Motors won’t own Nissan and Renault, it’s the other way around. If you’re combining shares of ownership wouldn’t that ownership go to Nissan and Renault’s marketshare, not General Motors? And does Toyota claim almost 10 percent of Subaru’s marketshare when it adds up it’s global marketshare?
The biggest elephant in the room that no one is addressing is the UAW. Is Kerkorian expecting Carlos Ghosn to come into General Motors and unravel the UAW? Carlos Ghosn is known for going into Nissan back in 1999 and getting rid of the "keiretsu" that had a stronghold on the purchase of parts and supplies for Nissan. According to the OECD, the senior managers of the keiretsu companies of the Nissan Group were former Nissan employees, which made it difficult to refuse to buy from those keiretsu companies, even when they were not competitive. Is Kerkorian expecting Ghosn to take the helm of General Motors and work a deal with the UAW?
Or is Kerkorian only looking for a collaboration of parts, supplies and technology? If that is the case, even that may not help General Motors as quickly as Kerkorian wants. Remember, Kerkorian is not into this to see Nissan and Renault succeed; he owns no stock in Nissan or Renault. Maybe that is why the French Industry Minister, Francois Loos, is cautioning Renault to go slowly. France, unlike Kerkorian, owns 15 percent of Renault. Loos has a right to question what is in for the shareholders of Renault. Can General Motors help Renault’s bottom line? Possibly in small diesel engines. Renault has been making diesel engines in Europe for years. Presumably, Nissan will use Renault’s diesel engine technology when Nissan brings their diesel engine into all 50 states, something insiders have said will happen.
General Motors has it’s own diesel intellectual property for diesel engines. General Motors has a 50 percent interest in a joint venture with Fiat for a powertrain manufacturing plant in Bielsko-Biala, Poland, that currently produces the 1.3 liter SDE diesel engine. General Motors also has a majority interest in some of Isuzu’s diesel engine businesses and complete ownership of Duramax, Circle L 1.7-liter and V-6 diesel engine technologies. This includes an acquisition of a 60-percent interest in Isuzu Motors Polska Sp. Z.O.O (Ispol), Isuzu’s small-displacement diesel engine business based in Poland, and an increase in GM’s equity investment in the U.S.-based DMAX Ltd. heavy-duty diesel engine business from 40 to 60 percent. GM also will acquire a majority interest in a new diesel engine engineering joint venture with Isuzu as well as rights to use various related technologies.
There is also the thought that Ghosn would come in and take manufacturing jobs to Aisa and Europe. That is already being done by General Motors. GM has plants all over the world. The number of UAW workers go down every year. GM has plants in Canada, where there are union workers, but those union workers don’t have job banks. Once their plant closes, the worker is let go, or in GM’s case, given a severance. Larry Kudlow, in his interview with Rick Wagoner, asked whether they would get rid of job banks for the unions. Of course, we know that Wagoner is going to dodge that bullet. Wagoner has a style of not answering questions and that was a smart one not to answer. The Unions could use the strike card against General Motors and, or, General Motors supplier, Delphi. Wagoner has said that there was a reduction in the job banks numbers with the last buyout of employees. Insiders have said that there is already a plan in the works that would increase the number of miles a person would have to go to work. Right now, if there is no job within 100 miles of the employees home, they don’t have to work.
Is Kerkorian thinking that by bringing Ghosn in they could get rid of a couple of brands? Back in April of 2006 York said GM should get rid of Saab and Hummer. Looking at the years from the time General Motors announced that they were shutting down Oldsmobile, 200-2004, till they quit production, there wasn’t a drop in marketshare. It wasn’t until 2004, well after SUVs had reached their peak and the Asian influx was in full bloom that General Motors marketshare started it’s consistent decline. According to Gina Proia, GM spokesperson, the closure of Oldsmobile cost GM about $950 million. GM doesn’t have $1 billion dollars to shut down each brand that they want shut down. Unless, of course, they sell 20 percent of General Motors to Nissan and Renault at somewhere between $3-3.8 billion.
According to Rick Wagoner, in an interview on CNBC’s Kudlow and Co., there has been no formal proposal by Carlos Ghosn. Ghosn has not submitted a proposal saying how much of a percentage Nissan and Renault would buy or how much they would like to pay for that percentage.
In the same interview Wagoner said that GM’s economist have looked at the economy and they don’t see a recession coming up. If that is the case, Wagoner said, and the United States economy hangs in there than General Motors might be able to do better than expected with these higher energy prices and higher interest rates. Wagoner believes that General Motors will be able to settle into lower levels with economic growth.
Does Kerkorian want to oust Wagoner, so that Ghosn can take over and GM’s stock will rise? Many have said so, but Wagoner won’t go quietly. The reality is that Wagoner wants the stock to go up, just like Kerkorian, so that he too can cash out someday. The other reality is that, perhaps, Kerkorian doesn’t have much time. In less than a year Kerkorian leaves octogenarian status and joins the ranks of the nonagenarian. Wagoner, a quinquagenarian, is nearly 40 years younger than Kerkorian and years away from retirement. Wagoner, like most stockholders, are much younger than Kerkorian and in for the longer haul. If they weren’t, they would have gotten out along time ago.
The question still remains, what Kerkorian will do if Ghosn doesn’t come on board or the stock of GM keeps going down? Will he sell at a loss? The bigger question is, how will General Motors fair? If Kerkorian sells will GM stock fall and their credit rating follow?