GM shares take off to the upside, spurred by well known billionaire

General Motors
With markets fairly quiet this morning our focus is back to the stock market and a story yesterday that is an absolute mystery, at least on the surface. Billionaire 87 year old U.S. investor Kirk Kerkorian once talked about in the same breath as the infamous Howard Hughes, and owner of the Mirage Hotel in Las Vegas shocked the financial world by agreeing to purchase a further $868 million dollars of GM stock. Kerkorian already owns 5% of GM, and this latest gambit of buying up to 22 million to give him about 50 million shares, gives him almost 9% of the beleaguered auto maker. His offer was at premium of 13.4% over the close of GM on Tuesday and boosted the stock by over 18% in yesterday’s trade to close at $32.80. What Kerkorian is up to is anybody’s guess, but he did not amass his huge wealth by being stupid. He obviously has watched GM languish over the past several years and the massive $1.1 billion loss suffered in the 1st quarter by the failing auto maker had to hit his position very hard. Kerkorian and other investors have watched their stake in GM fall by 50% last year and the stock went to its lowest level since almost going bankrupt back in 1992. Today, GM is by far the weakest manufacturer of the “big 3”, which includes Daimler Chrysler and Ford, but still controls over 24% of the U.S. market. However, when you are losing money at the rate of GM is now, being number 2 in America s damning with faint praise. But why take on a position of that magnitude at this time? Well, it is a well known gambit by wealthy investors to up the ante when they are behind the 8 ball in an investment of this size. If is either step up to the plate or watch the company go into chapter 11, and in our opinion GM is heading straight that way. In a market place that is cut throat competitive GM is able to eke out a profit of approximately $200 per car, whereas rival Toyota, now America’s number 2 auto makes, makes over $2,000 per car. GM is locked into union contracts with both current and former employees, unlike Toyota, that pay the richest health care, pension and unemployment benefits in the industry, if not all of North America. Annual payments to fund these benefits are over $5.6 billion dollars this year. In fact General Motors is the largest private provider of health care in all of the U.S. Guidance for the coming year had been reduced from $4 to $5 per share down to $1 to $2 earlier this year, and then when GM announced the $1.1 billion loss for the this quarter last month, they would not even comment on the guidance issue. Needless to say in this market, it is doubtful whether GM can turn the corner any time soon as North American auto makers, particularly GM, are giving away cars just to turn their investors. However, Kerkorian may not be entirely mad, and obviously has a plan of attack to rescue his investment and General Motors from certain death. The financial end of GM, including GMAC, which owns mortgages and other investments is said to be worth $25 per share and could be sold off any time to salvage the company. Kerkorian, with his large stake could force the unions to accept plant closures with resulting job cuts and then renegotiate benefit costs. There is no doubt Kerkorian will have a major say in the running of GM. However, in my opinion it was a life raft move that Kerkorian threw to GM, and I, though admittedly not as smart as Kerkorian, think that GM eventually will have to ask for Chapter 11 protection, a move that will heavily impact every world market.