Thursday, July 06, 2006

Daniel Howes: Is megadeal opportunity or mess?

Saturday, July 01, 2006
Daniel Howes
Daniel Howes: Is megadeal opportunity or mess?

The unprecedented change at General Motors Corp. just keeps coming.

On the Friday that thousands of longtime employees walked into cash-induced retirements, GM's billionaire shareholder, Kirk Kerkorian, revealed that he's talking with Carlos Ghosn about GM becoming a partner in Ghosn's Franco-Japanese alliance of Renault SA and Nissan Motor Co.

It's an astonishing proposal for a Detroit automaker that has been executing one stunning move after another in the past year -- a historic health care deal with the United Auto Workers, the buyouts of 35,000 hourly workers, a restructuring plan to close a dozen facilities, the unwinding of three global alliances, the sale of a majority stake in its GMAC finance arm, and the evisceration of benefits and bonuses for salaried workers.

But this has the potential to be the most stunning move of them all, the opening gambit of a global automotive recapitalization that could sweep across three continents and force the most ardently independent players into partnerships thought impossible.

Here we have GM's most prominent shareholder proving he is not the "passive investor" he claims to be. How? By asking GM's directors to "immediately" begin studying a possible tie-up with the Renault-Nissan alliance, a proposal that could be interpreted as a vote of no-confidence in the leadership of GM Chairman Rick Wagoner.

Or just the opposite.

"The timing is not coincidental," says David Cole, chairman of the Ann Arbor-based Center for Automotive Research. "The buyouts are completed and the health care deal is in place. GM is a cheap asset. Cheap assets and a turnaround under way are almost an irresistible carrot for the financial guys."

The bottom line: The fact that Kerkorian and his guy on GM's board, Jerry York, are reaching out to Ghosn & Co. and getting a serious response -- "It is necessary that (the) GM board and top management fully support this project," Nissan said -- means some of the industry's smartest heads see more value in GM than previously thought.

And GM's directors, bound by their fiduciary duty to shareholders, cannot ignore the proposal, no matter how many reasons they can conjure to keep the battered General entirely independent and fully American-owned.

There are all sorts of theoretical reasons a megadeal could position all three companies for the big battle for global dominance of the 21st-century auto business. GM would get a badly needed infusion of capital and could bolster its credit rating, reap economies of scale in purchasing and production, and acquire increased capability in research, development and engineering.

Renault and Nissan would dramatically increase their footprint in the world's richest market -- the United States -- share in GM's commanding position in the profitable, if shrinking, American truck market and leapfrog their competitors in developing markets with GM's leading spot in China and Latin America.

Or it could just end up in one big fat mess of recrimination -- after the executive firings, the failed organizational changes and after the huge checks to the investment bankers have cleared.

Theory and practice, as the 1998 union of Daimler-Benz AG with Chrysler Corp. and BMW AG's botched deal for Rover Cars attests, are two different things.

Add three automakers from three proud nations -- and the fact that the French government still holds 15 percent of Renault -- and you have a recipe for global gridlock that can't be good, at least in the first five to 10 years, for Detroit or America.

That's if the concept ever gets beyond the study stage.

"It's a pretty big distraction at this point," says Mark Hogan, CEO of Magna International and a former GM executive. "These things are pretty hard to put together, and Renault and Nissan aren't exactly hitting on all cylinders right now. I don't know what the benefits would be."

More realistic would be to consider what the negatives would be. The world's largest automaker, GM has spent the past 15 years pushing to achieve what the megadeal would purport to achieve -- economies of scale in purchasing, common manufacturing and product development processes, global leadership in developing world markets.

Its restructuring in the United States is making progress, but it is far from complete. This week marks the largest of several waves of retirees leaving GM's ranks, and the all-important 2007 national contract talks with the United Auto Workers loom.

And GM's track record with global alliances is poor. Its deal for 20 percent of Fuji Heavy Industries, parent of Subaru, never delivered as advertised. A $2 billion deal with Fiat Auto SpA cost another $2 billion to exit, leaving GM mostly with diesel engine technology for Europe and Latin America. And a portion of its 20 percent stake in Suzuki Motor Corp. ended up in the hands of archrival Toyota.

"You've got to work with incredible complexity to make this work," an industry CEO told me. "Start with suppliers. Start with the unions. Start with the boards of directors -- you've got French, you've got Japanese, you've got Americans, and you've got to get someone to make it work."

Whether that's Ghosn or Wagoner or York, a wannabe GM chairman, remains to be seen. But the recent history of these megadeals is that they seldom -- if ever -- deliver the "synergies" their highly paid outside architects say they will.

A simple fact of today's auto industry is that the most successful companies are focused, disciplined operations, have fewer brands and emphasize growing what they have -- not acquiring problems. They are Toyota, BMW, Honda and Porsche.

It's the big, transnational, multibrand behemoths, including Volkswagen, GM and Ford, that struggle and are sometimes tempted to look for redemption or a big payoff in the next Big Deal.

Whether GM, stung by its global forays, and Renault-Nissan, evidently hungry for another audacious play, place new bets is still to be determined. But given the track record of these deals, it's hard to see how any of it would be good for Detroit or the American industrial independence -- unless the French and the Japanese let the Americans take the lead.

Right. Or shall we say, non?

Daniel Howes' column typically appears Mondays, Wednesdays and Fridays. He can be reached at (313) 222-2106 or

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