The big consumer news out of General Motors lately has been employee discount pricing, the buy-low program that will end on Sept. 30. But GM's biggest shareholder, Kirk Kerkorian, has taken quite a different approach to purchasing GM stock: He's buying high. The 88-year-old billionaire takeover tycoon is even willing to pay higher taxes to make his strategy work.
Has Captain Kirk lost his golden touch? You might think so -- but there's a good explanation for his latest Motown maneuvers. He thinks GM's cheap, and he'd rather buy boatloads at higher-than-market prices than pinch pennies and end up with fewer shares than he wants.
Kerkorian, who finished his most recent round of purchases last week, now owns 9.53 percent of GM, a huge stake. Even though GM stock has fallen well below the $35 to $35.71 a share he paid for his recent purchases, as of Monday he was still up almost $140 million on an investment of $1.62 billion.
You'd think that such a big stock buyer might command a volume discount, the way GM does when it buys zillions of brake pads or door handles. But Kerkorian's latest filings with the Securities and Exchange Commission show something funny. On the occasions that Kerkorian placed orders for stock, he paid as much as $1.20 a share above the highest price the stock reached that day.
That's because he made three large private purchases -- presumably from Wall Street players who lined up stock for him on the quiet so the world wouldn't know what he was doing. That way, he could buy $480 million of stock without news of his trades getting out, and running up GM to even higher prices than he paid for it.
Even billionaires occasionally prefer borrowing from banks to tying up their own cash, so Kerkorian has gotten a $400 million line of credit from Bank of America to buy GM stock. And B of A isn't just any bank. It's the same bank that earlier this summer agreed to buy $55 billion of vehicle loans made by GMAC, GM's financial arm.
This means B of A is financing both sides of what I consider an inevitable Kerkorian-GM battle. This isn't what you usually expect banks to do, but you can see why it happened. The bank clearly was happy to put billions to work buying GMAC loans, but wasn't about to walk away from Kerkorian after having lent money to him for 50 years. Meanwhile, GM wasn't about to pull the plug on the GMAC deal because selling those loans is a key part of its strategy to cope with having lost its investment-grade credit rating.
I'd love to tell you what GM, B of A and Captain Kirk have to say about all this, but none of them would discuss it with me.
Anyone who's hung around Detroit recalls how Kerkorian bought a big stake in Chrysler in the 1990s and for years said all the right things about supporting management. But he grew impatient and launched a hostile tender offer in 1995. It failed, but Kerkorian ultimately helped force Chrysler's sale to DaimlerBenz, now DaimlerChrysler. He made a fortune on the sale.
Because Kerkorian is such an important borrower, his loan agreement with B of A allows him to mount a proxy campaign against GM. You don't see often see banks granting borrowers permission to attack other bank customers, but B of A gave him similar permission when he borrowed in the 1990s to buy stock in MGM Grand and Chrysler.
The GM loan agreement prohibits Kerkorian from buying more than 10 percent of GM. But what would happen if Kerkorian really, really wanted to change the terms? I suspect B of A would change them and take its chances with GM.
Kerkorian is buying GM stock through corporations he owns rather than buying as an individual. This is where his bigger tax bill comes in. Because his corporations are borrowing money to buy additional GM shares, they're giving up a nice tax break.
If a corporation buys stock with borrowed money, it has to pay more taxes on the dividends it gets from that stock than if it used cash on hand. I'll spare you the gory details, except to say that this provision -- 246A of the Internal Revenue code -- is known as the T. Boone Pickens rule. Lehman Brothers tax expert Robert Willens says that's because the provision was sponsored by the late Sen. John Heinz of Pennsylvania in the 1980s to help thwart a hostile bid for Pittsburgh-based Gulf by Pickens's company, Mesa Petroleum.
By my math, the legacy of Pickens's bid is costing Kerkorian's companies about $2.6 million a year in higher federal income taxes on their $108 million of annual GM dividends. That will rise if Kerkorian increases his borrowings, which were $187 million as of last week. Why is Kerkorian doing things this way? Beats me.
The bottom line: This all shows Kerkorian thinks GM stock is a Wall Street version of discount pricing. By the time he's 90, we'll find out if he was right.
Sloan is Newsweek's Wall Street editor. His e-mail is email@example.com.