GM's CEO feels the heat as troubles mount
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DETROIT - It's autumn in Detroit but General Motors Corp. (GM) Chairman and Chief Executive Rick Wagoner is feeling searing summer heat.
The pressure is mounting on Wagoner with its main auto parts supplier in bankruptcy, GM's share price near multiyear lows and its once-robust sales of gas-guzzling SUVs stalled.
And now he has legendary corporate financier Kirk Kerkorian breathing down his neck and demanding a seat on the GM board. Kerkorian got some help from the U.S. government on Tuesday, when it said he could increase his ownership stake in GM from the 9.5 percent he now holds.
"The heat is excruciatingly high," said Gerald Meyers, a former Detroit auto executive who now teaches business at the University of Michigan.
While GM remains the world's largest automaker -- though, it seems likely to slip behind Toyota Motor Corp. within the next few years -- it remains mired in red ink and rating agencies are taking an increasingly dim view of its prospects, with Standard & Poor's cutting its debt further into high-yield or "junk" status on Monday.
Lately, there seems to be no end to the obstacles blocking its return to profitability.
Among other problems, GM's September U.S. vehicle sales fell 24 percent, as high gasoline prices slammed the sales of giant sport utility vehicles. And months of talks with the United Auto Workers over GM's demand for cuts in union health care and other benefits -- costs identified by Wagoner as the company's biggest single challenge -- appear to have led nowhere.
In more bad news, it said a bankruptcy filing by auto parts supplier Delphi Corp. (DPHIQ) could put it on the hook for as much as $11 billion in additional health-care, pension and life-insurance liabilities.
Delphi's Chief Executive Steve Miller warned in an interview published in the Financial Times on Tuesday that a collapse of Delphi could "fatally wound" its former parent.
GM, which spun Delphi off in 1999, remains its biggest customer. S&P cited that as a reason for its latest downgrade of GM, saying it would likely confront the automaker with demands from Delphi for price relief and possible supply disruptions.
KIRK JOINS THE FRAY
Despite the steady stream of grim tidings, GM shares rebounded on Tuesday, after this weekend's Delphi bankruptcy filing slapped them down by 10 percent on Monday.
On Tuesday, the shares ended up 3.7 percent, to $26.42, following the news that Kerkorian was looking to play a larger role at GM.
In remarks last month, GM Vice Chairman Bob Lutz said Kerkorian "smells turnarounds" and that may be why he has built his stake in GM, becoming its biggest individual investor.
But analysts have said Kerkorian may seek to capitalize on his investment in GM, which is currently under water, by pushing for something like a spinoff of core parts of its profitable finance arm, General Motors Acceptance Corp.
At the very least, Kerkorian, whose interest in GM has been described by his spokesman as a "passive investment," could put pressure on GM to ratchet up its stock price.
As someone who has made a long career of maximizing shareholder value, Kerkorian might also demand that GM stop paying a $2.00 dividend that costs it about $1 billion per year in cash flow.
Some analysts see the dividend as totally out of line with a company facing its worst crisis since it nearly went bankrupt in 1992.
HOT SPOT
GM, which lost $1.4 billion in the first half of the year, including $2.5 billion in North America alone, is expected to post another dismal quarter when it reports its third-quarter results next week.
Analysts on average are expecting a third-quarter loss of 68 cents per share, according to Reuters Estimates. But Burnham Securities analyst David Healy said on Tuesday he sees GM posting a much larger loss, between $1.50 and $1.75 per share.
"I would be surprised if they show a third quarter that's better than my numbers, and I'd be interested in finding out why," Healy said.
So far, investors and GM's board have shown little or no sign of exasperation with the slow pace of GM's turnaround, or with Wagoner, who has headed the automaker since 2000. But that could soon change.
"The pressure on GM management is greater than ever ... to adopt a more aggressive turnaround strategy," said Merrill Lynch analyst John Casesa.
GM's chief spokesman Tom Kowaleski declined to comment on Kerkorian's interest in GM or on "speculation" about investor confidence in Wagoner's leadership.
"There's nothing really for us to say ... We know what the issues are. We know what the challenges are. Rick and the entire senior management team is hard at work on every single one of them," Kowaleski said.