Kerkorian Sees a Different Shape in GM's Sinking Ship

Talk about timing. Last Wednesday, billionaire takeover artist Kirk Kerkorian, having secretly accumulated a 4 percent stake in struggling General Motors over the previous two weeks, offered publicly to buy an additional 5 percent for $868 million. The very next day, Standard & Poor's credit analysts downgraded GM and Ford debt to junk status, hammering their stocks and raising doubts about their futures.

Does this conjunction of events mean that at 87, Kerkorian has finally lost his game? I don't think so. And I won't think so even if, as I expect, GM cuts its fat $2 annual dividend as a symbolic sacrifice to induce its workers, retirees and other constituencies to help it dig out of the deep hole into which it has fallen.

Kerkorian, who started buying GM stock on April 22, according to his filings with the Securities and Exchange Commission, has gotten to be No. 30 on the Forbes 400 list of richest Americans by looking at the world differently from other people. Many people look at GM and see a sinking ship. But Captain Kirk sees a treasure galleon.

To steal a line from my Newsweek colleague Keith Naughton: For a car company, General Motors is a great bank. Its finance arm, GMAC, has a terrific mortgage business and is a jewel probably worth about $20 billion. This despite having had its credit downgraded along with GM's.

If you can somehow spin off GMAC tax-free while leaving its parent's pension and health care liabilities behind with the vehicle business, that would be worth about $35 per GM share. That's more than GM's closing price of $31.33 yesterday. And it's considerably more than Kerkorian's average cost, which would be about $29 a share if his tender offer, launched yesterday, goes as planned.

If you can get GM to distribute some of the $40 billion of cash in its treasury and an employee-benefit trust, you're even further ahead. (GM can't distribute the trust money as a dividend, but it can use it to pay benefit bills, which would free up other cash.) Kerkorian's reps are making all sorts of soothing noises about his being a passive, long-term investor. They say he has no plans to seek a board seat, and has no thought of offloading any of GM's treasures. The documents that Kerkorian filed in connection with his offer say only that he considers GM stock undervalued. There's no mention of seeking influence over the company.

But none of this is exactly an oath signed in blood. Should GM continue to stay dead in the water, you can be sure that Kerkorian won't stand by passively and watch his $1.4 billion investment sink beneath the waves. Owning 50,000 shares or even 500,000 shares gives you no influence over GM's management. Owning 50 million shares, Kerkorian's current target, is a whole other thing.

Should GM's North American car business begin hitting on a few cylinders, which might happen, GM would become a cash machine again. In that case, look for a replay of the game Kerkorian played at Chrysler in the 1990s. When Chrysler finally turned around and started making tons of money, it wanted to hoard cash, as Detroit automakers have learned to do. You can see why, given that U.S. car companies tend to swing almost overnight from generating tons of cash to hemorrhaging cash.

Ford, for instance, would no doubt love to have back the $7 billion that it spent five years ago to buy back stock from its shareholders at a time Wall Street was whining that the company's cash holdings were excessive.

At Chrysler, Kerkorian made sure the company disgorged big chunks of its cash rather than keeping it around as a cushion. You can be sure that Kerkorian will do the same at GM, provided that he sticks around for the long term. For now, he's keeping his options open because his stake would be a tad below the crucial 10 percent level. At 10 percent, selling could ensnare him in something called the short-swing profit rule.

If Kerkorian ultimately gets GM to spin off GMAC, the company will be left weaker financially than it would otherwise be. That would make it more vulnerable to the next, inevitable downturn in the auto market. But that would be GM's problem, and its workers' and retirees' problem, and possibly the U.S. Pension Benefit Guaranty Corp.'s problem and the U.S. taxpayer's problem. It wouldn't be Captain Kirk's problem, however. He'd be off on his endless trek seeking strange new financial worlds to conquer.

Sloan is Newsweek's Wall Street editor. His e-mail address issloan@panix.com.