Kerkorian Cashes Out

With Kerkorian Gone, What Now for GM?

General Motors CEO Rick Wagoner tried to generate some good news for his struggling company this week. On the eve of the glitzy L.A. Auto Show, he rolled out the curvaceous new Buick Enclave crossover utility vehicle with help from Tiger Woods. Then he fended off a heckler while delivering a speech on how GM is going green, developing cars that run on hydrogen, as well as gas-electric hybrids that can plug into a wall socket in your garage. But for Wagoner, who's been under siege for more than a year, the best news of the week came Thursday, when Las Vegas billionaire Kirk Kerkorian cashed out his final 28 million shares of GM stock. In the course of a week, Kerkorian—who analysts believed was gunning for Wagoner—went from being GM's largest individual shareholder to just another outsider the Detroit establishment ran off the road. "Rick will sleep very well this weekend," says the veteran auto analyst David Cole, a longtime friend of the GM chief.

Being sleepless in Detroit hasn't proven such a bad thing for Wagoner & Co. General Motors is now Detroit's healthiest automaker and much farther along the road to recovery than its crosstown rivals, who are hemorrhaging billions while GM is merely losing millions. And in a large way, Wagoner has Kerkorian to thank for that, analysts say. Sure, the two probably parted ways because Wagoner wouldn't go along with Kerkorian's ambitious plan to align GM with France's Renault and Japan's Nissan, creating a car colossus that would have controlled a quarter of the world's auto market. But Kerkorian also put some much-needed pressure on GM management to get the lead out. Last January, Kerkorian aide Jerry York, a former Chrysler and IBM CFO, publicly called for GM to cut is dividend and slash executive pay; a month later, GM did just that and put York on its board of directors. Analysts say those moves helped convince the United Auto Workers union to agree this summer to a historic buyout of 34,400 workers—one third of GM's U.S. workforce. "Kerkorian's intention was to create pressure and a sense of urgency," says Merrill Lynch auto analyst John Murphy, "in order to have the company ready when things get even tougher."

Now that Kerkorian has exited, will GM be ready for such tough times? Wagoner certainly thinks so, and his supporters point to the $9 billion in cost cuts he's made in the last year, plus the $14 billion he raised this week by selling off half of GM's financing arm, GMAC. "Rick came out with a clearly defined plan in 2005 and we continue to map to that strategy," says GM spokeswoman Renee Rashid-Merem. "There's been remarkable progress."

But analysts believe GM's progress would not have been as remarkable if Kerkorian hadn't started amassing his nearly 10 percent stake in GM in April 2005. Even before Kerkorian signaled any displeasure with Wagoner's methodical approach, his mere presence put the heat on. After all, he's well known in Motown for making a hostile bid for Chrysler in the '90s that eventually led to its buyout by Daimler-Benz (and a rich payday for Captain Kirk). "He forced GM management to dramatically advance their time table," says veteran auto analyst Joe Phillippi of Auto Trends Consulting. Now that Kerkorian's gone, Wall Street worries GM will ease up. In fact, Standard & Poor's downgraded GM's stock, warning investors they should sell because the automaker had lost a "catalyst" for change.

Wall Street also is worried about the clear vote of no confidence Kerkorian's retreat represents. Kerkorian only broke even on his GM bet, selling his shares for nearly $1.7 billion. That's not how the 89-year-old Vegas mogul built up a fortune that Forbes estimates at $9 billion. And he's folding his hand following York's bitter resignation Oct. 6 from GM's board after the collapse of the talks with Renault-Nissan. In his resignation letter, York wrote that he had "grave reservations" about GM's ability to "successfully compete" against Asian automakers. Now investors wonder whether Kerkorian and York know something they don't. "Kerkorian and York have been inside and they got a view into the future at General Motors that none of us have," says University of Michigan business professor Gerald Meyers, a former chairman of American Motors. "And then they voted no confidence. That's not good news."

Ultimately, Kerkorian joins a long line of outsiders who exited unhappily from GM. Remember Ross Perot, who derided his fellow GM directors for being "pet rocks" as he walked out the door? And then there was Ron Zarella, the marketing exec who failed to institute a "brand management" revolution at GM before he returned to the company he came from, Bausch & Lomb. When it came to Kerkorian's push to overhaul GM, Wagoner proved himself a skilled tactician at quelling the threat to his leadership. And when it looked like Kerkorian might wage a proxy fight for control of GM, Wagoner convinced his directors to stiffen rules to make such a boardroom battle difficult. "GM tends to throw off these antibodies," says Phillippi, "and they always rise up and kill off the invader."

Ford's new outsider CEO, former Boeing exec Alan Mulally, can only hope the same won't hold true at his new employer. But the fact is that insular Detroit has a long tradition of rejecting interlopers. "Detroit is an old boys' club like you've never seen," says one Wall Street analyst who asked not to be identified for fear of retribution. "And that's going to be the death of them if they're not careful." But if Kerkorian accomplished anything in his bumpy ride with GM, it was to convince the automaker—and perhaps all of Detroit—that it no longer owns the road and needs to shrink to survive. That's why 72,000 workers are now heading for the exits at GM and Ford. With Kerkorian riding off, too, Motown can't afford to let off the gas.