We’ve had a few cynical comments on the GM / Kerkorian affaire.
John Mauldin has an interesting and opposing take. Its worth seeing a different take on the issue, and John does a nice job with it here: A Stable Disequilibrium. Its buried in the middle of a lengthy piece; Here is the relevant excerpt:
"I find it interesting that that old corporate raider, Kirk Kerkorian, is now on the prowl for General Motors. At first glance it seems like this 87 year-old gentleman has finally lost his marbles. The company is by definition a stable disequilibrium. When the divorce begins between the shareholders, bondholders, unions and retirees, it will make a Donald Trump divorce look like child’s play.
However, I don’t think I would bet against Kerkorian just yet. He’s got all the money that he could possibly spend, but there’s a lot more than money riding on this deal. If he can somehow pull something out of the fire that is General Motors, it will be a deal for the ages. It will get him more than a few footnotes in history, and that is the only thing he doesn’t have now. I’m not privy to his personal counsel, but I think I see a rhyme in his actions. Basically, General Motors is an auto and mortgage finance company that builds cars as a hobby. A hobby, I should point out, that loses a lot of money.
If you could get rid of that money-losing hobby along with the pension and health care commitments, General Motors is actually worth quite a lot of money. Substantially more than Kerkorian is now paying. Watch for him to start agitating for General Motors to spin off their finance divisions. Then watch for the car division to file bankruptcy. Those shareholders get screwed, but they more than make up for it with the profits on the financial subsidiaries. The pension and health benefits get renegotiated and General Motors survives.
Perhaps more benignly Kerkorian may suggest that the board simply give the auto manufacturing portion of the Company to the unions. Kerkorian takes some of the debt in exchange for the finance operations, throws in a few incentive clauses here and there, and voila! Kerkorian walks away with another billion or so, along with a few footnotes.
And now back to our regular story.
On the other hand, Kirk could have simply been trying to create a short squeeze to increase the value of his prior holdings purchased at $24 per share. Note that he set the tender very close to the market price. Note further that he could have purchased these shares without a tender, privately and secretly in the market without any disclosure.
Note the effect that he already has accomplished. Nobody will tender their shares to him as the market spiked above his close tender price. Note also that he has already made $80,000,000 on this tender without buying one additional share.
Barry, I made this comment last week, “If Kerkorian is sucessful, GM will be parted out.” But it gets even better since the downgrade.
He will sell the non core assets of GMAC such as the home mortgage division, raising $28 Billion and then walk away from the “hobby” business of building cars.
This will cause a convergence on the debt and anyone who has arb betting on a divergence of GM and GMAC debt is going to get their heads handed to them.
And thats most of the hedge world at this moment. How would you like to be holding CDO on margin for this shindig? Or a bank or insurer involved in the dance?
For details: http://naybob.blogspot.com/2005/05/yo-junk-bond-my-ride.html
K will see the stock go to $45, take big part of gmac with the profits ,go back to vegas and add few more billions to his portfolio.I understnd that enrollment has dropped in the m.b.a. program:when it was revealed that Mr K. didnnt go beyond the 7th grade
What in the Hell makes you think the American government wants those kind of pension obligations?With the Pension Guarantey board in hoc to the tune of 23.5 billion bucks, what in the hell do you think they will be in hoc to for Ford and GM?Should the average American taxpayer subsidize managerial failure especially with Bush’s ill advised tax cuts?That is the trouble with u suits!You never think past the consequences of your actions beyond the next quarterly report!
steve