Kerkorian's Bold GM Gambit

You can't say Kirk Kerkorian isn't a bold poker player.

Friday's Wall Street Journal details his bid to buy an additional six million shares of GM, and plans to perhaps buy another six million. These stakes, if purchased, according to the Journal article, would make Kerkorian the second-largest GM shareholder, with a 12% position.

Although it looked like a losing position this summer, Kerkorian's original investment has now gained about 14%, thanks to GM's recent stock price rebound, on the basis of cutting deals with its unions over buyouts and layoffs.

The Journal piece characterizes the GM situation as becoming a sort of show down between CEO Rick Wagoner, who wants to slowly rebuild the company, if there's time, and Kerkorian, who wants a much faster, thorough restructuring, including a three-way alliance between GM, Renault and Nissan.

My recent thoughts on the GM situation can be found here. Suffice to say, I don't think GM is a viable performer, in terms of consistently superior total returns, without some sort of outside help or alliance.

Kerkorian is certainly playing a bold game, though. He could take his winnings off the table at this point, and have outperformed the S&P for the period. However, he chose instead to double-up, indicating he's after a much bigger gain, and prepared to invest the time and effort to secure it.

By moving to take a larger position, the betting is that, in the language of his SEC filing, "there should be strong GM board involvement" in assessing potential alliances. Meaning Kerkorian wants to outmaneuver Wagoner's internal attempts to scuttle the alliance, and get it approved by the board, out of Wagoner's direct reach and control.

It's hard to guess what the outcome will be in this case. There are so many options for Kerkorian, and the rest of the GM board. However, I don't recall Kerkorian leaving a situation like this with a loss. If he's prepared to add to his GM stake, then he must feel very confident that he can force the alliance, and reap the gains he expects from a resultant higher GM stock price.

In a sense, he can't lose, in the long term. If Wagoner's alleged "turnaround" really is more than short-term cost cutting, then the shares will rise, and Kerkorian makes more money. If Wagoner is wrong, Kerkorian, as the second-largest shareholder, through his employee, Jerry York, can probably force Wagoner's departure, and proceed with an alliance for GM. The only question at that point is whether or not Ghosn's Nissan is still open to the alliance, or has already tied up with Ford.

Could it be that Ghosn, watching from outside, could now hold off from a Ford alliance, and simply wait Wagoner out, knowing that Kerkorian will eagerly come calling, with less onerous terms than Wagoner has demanded?

It continues to be a phenomenonally interesting end-game for GM and Kerkorian, as the time to demonstrate a believable, lasting reversal of GM's fortunes grows shorter.