NEW YORK - The fundamentals at General Motors Corp. haven't changed a bit, but in the course of a few days the market's attitude toward the world's largest automaker went from bad to good to who knows what could happen next.
Billionaire investor Kirk Kerkorian announced on Wednesday that he wants to increase his investment in GM, and that sent GM's stock rocketing to its largest one-day percentage gain in more than 40 years. Many investors seemed to think he would be a saving grace at a time when the struggling automaker doesn't have much going its way.
Then a day later, Standard & Poor's cut GM's credit rating to junk status. While its downgrade had been expected, the timing surprised and rattled investors.
So what is the prognosis for GM?
Let's face reality: Even if Kerkorian pushes GM management and its unions to come up with a way to stem its massive losses, declining market share and huge health care and pension burdens, this company won't be a quick fix.
If Kerkorian's company, Tracinda Corp., follows through on its offer to buy up to 28 million GM shares for $31 a share, that would boost his stake in the company to around 9 percent. Such ownership would clearly give him clout with GM management, and though Kerkorian has indicated he planned on taking a passive role with GM, few expect that's how it will ultimately turn out.
So why GM? Why now?
GM certainly doesn't appear to have much to offer, something that was noted by S&P on Thursday when it lowered GM's debt to non-investment grade, or junk. That "reflects our conclusion that management's strategies may be ineffective in addressing GM's competitive disadvantages," S&P said in a statement.
After S&P's announcement, GM's stock fell nearly 6 percent to trade at around $31 each. That ate away at some of Wednesday's 18 percent share-price gain following the Kerkorian news.
The automaker lost a whopping $1.1 billion in the first quarter, its sales are off nearly 5 percent so far this year and it faces billions of dollars in health and pension costs.
GM CEO and chairman Rick Wagoner is trying to end the company's prolonged slump. In early April, Wagoner took over daily responsibility of the automaker's North American division in hopes of reviving that key facet of the company's operations. To date, though, despite a host of new vehicles, GM continues to flounder.
Wall Street clearly is hoping that Kerkorian has a plan to shake things up - something he's done in the past at other companies including rival automaker Chrysler Corp., where he has had large ownership stakes.
"His presence as a large investor may light a fire under management to come up with a more comprehensive turnaround plan," said B. Craig Hutson, senior bond analyst at Gimme Credit, a research company specializing in corporate bonds. "An outsider can motivate management to make more drastic changes in its plans."
As Calyon Securities analyst Joseph Amaturo pointed out in a note to clients this week, Kerkorian could have easily bought shares on the open market - the stock fell below $25 a share last month for the first time in a decade - so his decision to announce the tender offer could be "making a statement, one that should be listened to by value investors."
And just by making the tender offer, Kerkorian's $31 a share offer price could have set a floor for the stock, Amaturo said.
But while Kerkorian's potential investment has boosted the stock, questions still remain over what - if any - kind of change Kerkorian can achieve. This is a big company, with big problems and a big unionized labor force that is in the middle of a contract that doesn't expire until September 2007.
Can he force management's hand to slash jobs, close manufacturing plants or shutdown any of GM's existing auto lines? How about winning health care concessions? None of those efforts would come easy.
The S&P debt downgrade could give him a platform. Some on Wall Street also think that maybe just the threat of having to deal with an investor like Kerkorian - like the image of the big, bad wolf waiting outside the door - could be the impetus for the unions to come to the table with current management.
"Tracinda is likely to lobby for management changes. A new management team would be more likely to seek and get substantial labor concessions, as union leaders would not be able to point to prior management mistakes as reasons not to compromise," said Brian A. Johnson, an analyst at Sanford Bernstein.
And there is also the chance that he isn't focused at all on the auto business, but instead believes there is some potential unrecognized value in its GMAC finance subsidiary, which is expected to generate net income of at least $2.5 billion this year.
Analysts estimate that the non-auto businesses at GM could be worth as much as $25 a share, and Kerkorian could push to have that spun off.
Maybe the only certain thing right now is that Kerkorian has his eye on GM, and should his investment seem to sour, there is no doubt that he surely won't be a passive investor any more.
The Augusta Chronicle ©2012 Morris Communications, LLC. All Rights Reserved.
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