Kerkorian's GM Bid Doesn't Fix a Thing

General Motors, which despite everything remains the largest car maker in the world, posted a $1.1 billion loss in the most recent quarter. In the same quarter of 2004, the company earned $1.2 billion -- a $2.3 billion swing the wrong way. So, when Kirk Kerkorian, the 87-year-old billionaire, made an offer on 4.9% of GM's stock, which would bring him a total stake of about 9%, Wall Street ate it up. GM stock rose 18% in a day. But a bucket of cold water is on its way -- the offer doesn't change much.

The losses stem from a very simple fact -- with gas the far side of $2 a gallon, the highly profitable SUVs aren't selling the way they did a year or two ago. Had this situation not arisen, the health costs and other worries that investors and management have wouldn't be serious. After all, GM's Asia-Pacific operations profited by $60 million, and its finance wing, GM Acceptance posted a profit of $729 million. Its North American car business is the problem, which lead the rating agencies to downgrade its debt to junk yesterday.

And that is why Mr. Kerkorian's investment is best seen as a value purchase rather than as an effort to shake things up. GM lost the economy car market to Japan and other nations years ago. Detroit has set its sights on the hydrogen car as the future of autos -- which may be the case in 15 or 20 years. Yet, that doesn't put an American hybrid in the market to compete with Nissan; hybrids are so popular in some markets that used models are selling for more than their original price. GM has let this slip away from it.

With 9% of the stock, Mr. Kerkorian's Tracinda investment entity won't be able to purge management or force radical changes. It is big enough to get questions raised but not so big that it can impose solutions. What may be at stake is the inherent value of brands and franchises that could be unlocked by reform rather than revolution. Terry Christensen, Mr. Kerkorian's lawyer, said the move was a "passive investment."

Or it may the an ego thing. Mr. Kerkorian was the biggest investor in Chrysler before Daimler-Benz in 1998 entered into a "merger of equals" with Chrysler. Mr. Kerkorian is still suing in court because he maintains it was misrepresented as a merger when it was, in fact, a takeover. He may just want to be a player in the auto game, and any opportunity will do. That isn't a recipe for fixing what ails GM.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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