GM's Wagoner Gets Ready to Fight Back

If third-quarter earnings are as strong as expected, GM's CEO will have much-needed firepower for a possible proxy fight with Kerkorian

General Motors' (GM) Chairman and CEO G. Richard Wagoner Jr. looks like he has, for the moment, got some breathing room from dissident shareholder Kirk Kerkorian. Barring any nasty surprises, and if the company announces a profitable third quarter as expected, he will have the punches he needs if there is a proxy battle with the feisty billionaire Kirk Kerkorian, whose investment company Tracinda owns 9.9% of GM stock.

Kerkorian's camp has been vocal about its displeasure with GM's board and management, raising the possibility that he could wage a proxy battle to get control of the board. But with GM's profitability on the rise, Kerkorian may have a tough time getting his way.

Hefty Turnabout

Wall Street analysts forecast that GM will show a $274 million third-quarter profit on Oct. 25 when it announces its third-quarter earnings and should make another $560 million in the fourth quarter. Sure, that's the equivalent of a rounding error for Toyota (TM). But that's a hefty turnabout from GM's $10.6 billion in red ink last year. Says David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.: "Rick's best defense is better and better earnings."

Indeed, a couple of good quarters come at a bad time for a proxy fight. Kerkorian would have to file a ballot with a new slate of directors in the next several months to get a vote at next spring's annual shareholder's meeting. Unless he and his man-at-arms (and former GM director) Jerome York can win over GM's historically passive shareholder base, or find a host of rich players to buy GM stock and vote their way, it will be tough to gain control by arguing that Wagoner isn't doing anything right.

But that's not even close to being the endgame. What Kerkorian does will end up being a referendum not just on Wagoner's yearlong restructuring plan, but on whether Wagoner has, as he has said, engineered GM for long-term "robust profitability."

Is It Enough?

Wagoner has been repeatedly asserting that GM is on the right track. He points to rising revenue, new models, $9 billion in cost cuts, and the big concessions he won from the United Auto Workers. The company has issued a statement saying that its progress is "well ahead of what some skeptics thought possible." When addressing journalists about ending alliance talks with Renault-Nissan (NSANY), Wagoner noted that GM's stock was up 70% this year and said, "we have done some big things and some bold things."

While it could be argued that Kerkorian's pressure on GM has been one of the reasons behind the company's improving fortunes, people close to Tracinda say that the 89-year-old Kerkorian is not satisfied with incremental gains. Moreover, he and York do not believe that Wagoner has really fixed the company. And should GM fall into the barrel again, they will have the will and a better argument to get shareholders to help them force bigger change.

They think longer-term problems will arise. And with GM's stock trading at just $31 a share, it's a cheap buy for any private money that wants to get in on Kerkorian's high-stakes game. Kerkorian could let the next stockholder's meeting go by while waiting for some bad news to give him a more opportune time to strike.

Post-Launch Slump?

Kerkorian's camp has been worried all year that GM's earnings are up in part because it has been filling dealer lots with large new SUVs all year and will be doing the same thing with its large pickups when they start coming out this quarter. Since carmakers book revenue when a vehicle leaves the plant, they can show a jump during a new-vehicle launch. But once the dealers have enough of the new vehicles to sell, the factories slow down the assembly line and revenue drops again.

Kerkorian's side has a point.

If GM can't boost market share,keeping revenue aloft will be hard. Global sales fell 3% in the third quarter. New product launches become more scarce after next year, when the pickups, the Saturn Aura sedan, and the new crossover SUVs from Buick and Saturn hit the street (see, 10/4/06, "Saturn's Awesome Aura").

Some analysts have similar concerns. Burnham Securities analyst David Healy has been fairly bullish on GM's earnings outlook. He credits the cost-cutting moves but said in a research report that, "the jury is still out on GM's product turnaround."

Continued revenue gains are vital, especially in light of the fact that most Wall Street analysts see GM earning $2 billion or $3 billion next year. And that's with the full $9 billion in cost cuts hitting the bottom line next year.

GM Confident

Morgan Stanley (MS) analyst Jonathan Steinmetz predicts that GM will make $3.2 billion in profit next year as the new pickups roll out. The company sells almost a million large pickups a year. The first half will be especially strong because the new Chevrolet Silverado and GMC Sierra pickup trucks will probably be loaded versions that sell at fat sticker prices, he says. But even with that boost, Steinmetz says, GM will burn $1.3 billion in cash in 2007.

Again, GM execs are unfazed. Vice-Chairman Robert Lutz points to new vehicles like the pickups, new crossover SUVs, and Saturn Aura—which have been well-received by the motoring press—as evidence that his new-car offensive is making headway. He has also pushed designers to give high-volume sellers like the next-generation Chevrolet Impala and Malibu sedans eye-catching lines. Lutz recently told BusinessWeek that even though GM has fewer new models in 2008, next year and 2009 will both be strong. "I, for one, do not worry about it," Lutz said in an e-mail.

But GM will still have to worry about Kerkorian. Wagoner has made a lot of progress, but just improving won't be good enough. He needs to really boost profits and get the stock price up not only to keep other shareholders from joining Kerkorian, but to keep new, hostile buyers away from GM's stock.

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