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Kerkorian and General Motors team up

Kirk Kerkorian's top deputy, Jerome York, now has a seat on General Motors' board. That's likely just the beginning of many changes to come. By BusinessWeek's David Welch
/ Source: BusinessWeek Online

After months of talks, billionaire investor Kirk Kerkorian has accepted a seat on General Motors' board. Kerkorian and GM have come to an agreement that puts former Chrysler and IBM Chief Financial Officer Jerome B. York, on the board as the billionaire's representative.

Sources close to the situation say GM is more willing to loosen some of the tight stock-trading restrictions that K.O.'d an agreement to get York on the board in December. York declined to comment, and a GM spokeswoman said only that GM has welcomed his presence on the board for some time.

York's appointment to the board is a clear sign that he and Kerkorian are taking a friendlier approach to management. Back in early January, when York made a speech suggesting strong medicine for GM, Kerkorian's Tracinda was exploring all of its options. Kerkorian could have picked a hostile move like nominating a short slate of three or four directors. But that appears less likely, now that York has joined the board.

Slicing and selling?
The deadline for nominating new directors or getting any other shareholder resolutions on a proxy ballot for this spring's shareholders meeting ends today. Since Kerkorian owns 9.9 percent of GM stock, he could negotiate a board seat without putting it on a ballot. In fact, York joins the board just as Merrill Lynch Chairman and CEO E. Stnaley O'Neil leaves. O'Neil cited time constraints for quitting the board.

With York on the board, Kerkorian can pressure other directors to push Chairman and CEO G. Richard Wagoner to make some of the stronger moves York has recommended. He wants to see GM cut its $2-a-share dividend in half, which would save $560 million a year in cash, as well as force pay cuts on its top executives. York also suggested that GM explore the sale of Hummer and Saab.

Making those big sacrifices would be a sign to the United Auto Workers union that GM — which lost $8.6 billion last year — needs a radical overhaul, York said last month. That could help GM wrest future concessions from a union that has already agreed to cut medical benefits for retirees and relinquish 30,000 factory jobs. York told BusinessWeek after his speech that he was serious about seeing his agenda through. But he wouldn't say to what lengths he and Kerkorian would go to do so.

A GMAC deal?
GM's board may take York's advice and cut the dividend, says Morgan Stanley analyst Jonathan Steinmetz. That would send the union a message that even shareholders are sharing the pain. GM's board usually votes on the dividend at the February meeting.

Analysts also think that GM is making progress on its sale of a 51 percent stake in its GMAC finance business. Recent press reports put Citigroup's private-equity group as a suitor. Steinmetz says the sales would raise $11 billion to $12 billion for GM. It could also get GMAC a better credit rating since a buyer like Citi has sterling credit and GM's debt trades as junk. So GMAC could grow faster and improve its margins.

On the downside, GMAC's improved earnings probably wouldn't offset the fact that GM will share half the profits with the new co-owner. GMAC contributed $2.8 billion in earnings to GM in 2005 and sent the parent company a fat $2.5 billion dividend. Both sums would be cut in half.

So, it's even more vital that Wagoner turn around the North American car business fast. But then, having cash could help GM buy out workers and get back in the black faster. York said in January that freeing cash is a good thing — if GM puts the money to work for restructuring. Now he's in a better position to make sure that happens.