Thursday, July 06, 2006

Is GM ultimate risk for Kerkorian?

Saturday, July 01, 2006
Is GM ultimate risk for Kerkorian?
Billionaire investor appreciates dangers and rewards of betting on ailing firms, analysts say.
Bryce G. Hoffman / The Detroit News

Kirk Kerkorian, the billionaire General Motors Corp. shareholder angling for a three-way alliance of GM, Renault SA and Nissan Motor Co., has always liked taking risks.

But this is a big one, even for a guy who owns 9.9 percent of ailing GM, the world's largest automaker.

Some observers say Kerkorian is drawn to GM by the same thing that drew him to the casinos of Las Vegas, where he became one of Sin City's original high rollers.

"It's the love of the game," said Joe Phillippi, president of Auto Trends Consulting in Short Hills, N.J. "It's not for money per se, because he's got plenty. And it's not about saving a great American icon, though he uses that phrase a lot."

Phillippi thinks Kerkorian is attracted to the automotive industry by its scale.

"Every bet in the automotive business is a billion dollars," he said. "It's a very expensive game to play."

Born in California to Armenian immigrants in 1917, Kerkorian dropped out of school in the eighth grade and earned his pilot's license by milking cows for a flight instructor. He went to Canada to join Britain's Royal Air Force before the United States had even entered World War II, volunteering for what many fliers regarded as suicide missions in exchange for $1,000 a trip.

Kerkorian not only lived to tell about it, but also used his earnings to start a small charter service back in the States when his tour of duty ended. That took him to Vegas.

In 1962, he bought 80 acres on the Strip for just under $1 million. He leased it to the builders of Caesars Palace and made $4 million off the deal before selling it to the casino for another $5 million in 1968.

Kerkorian went on to become one of the most successful hotel and casino tycoons in Las Vegas and became the 19th richest person in America, according to Forbes, which estimates his personal fortune at more than $10 billion.

The billionaire investor manages his vast empire through his Beverly Hills, Calif.-based Tracinda Corp. His interest in the automotive industry dates back to 1990, when he started buying shares of Chrysler Corp.

Kerkorian soon became Chrysler's largest shareholder and a close ally of then-CEO Lee Iacocca. Five years later, with Iacocca retired and the company's share price slumping, the pair made a play for control of the company. Their hostile takeover bid failed, but Kerkorian did convince Chrysler to put a Tracinda representative on its board, buy back shares to increase their price and boost dividend payments.

Kerkorian acceded to what was pitched as Daimler-Benz AG's "merger of equals" with Chrysler in 1998. But he later sued the new company, DaimlerChrysler AG, after then-CEO Juergen Schrempp told a London newspaper he called the deal a "merger" just to get it done.

Kerkorian, represented on Chrysler's board, claimed he had been duped into supporting what had all along been a straight acquisition of Chrysler. From the beginning, the Germans referred to the deal as "die Uebernahme," or the takeover.

Last year, in a closely watched case, a federal judge ruled against Kerkorian. But John Casesa, who follows the industry as a principal of the Casesa Shapiro Group LLC in New York, said Kerkorian had little to regret.

"I doubt very much it would have happened without him," Casesa said. "He did get them to sell the company a high price. He made a lot on that deal."

Last year, Kerkorian set his sights on GM. Already a major shareholder, he began increasing his stake in the company even as other investors were abandoning it. By December, he had amassed 9.9 percent of GM's shares and was ready to start shaking things up.

In January, Tracinda demanded that GM cut its dividend payments in half, cut executive compensation and consider selling off some of its weaker brands. The company agreed to the first two demands. A month later, Kerkorian forced GM to give Tracinda representative Jerry York a seat on its board.

Kerkorian's moves were seen as a challenge to GM Chairman and CEO Rick Wagoner, even though the savvy mogul insisted in regulatory filings that his interest was purely "passive."

"They're persistent in pushing their agenda," Casesa said. "These guys will not let up."

Why does Kerkorian do it?

Casesa said Kerkorian is a contrarian investor who fully appreciates the risks and rewards of betting on troubled companies like GM, and Chrysler before it. When he invests in a company, it is usually with an eye to altering the corporate course to boost share price and book a profit on his usually sizable investment.

"It is hard to rival buying into Chrysler at the bottom but he certainly has been one to see the restructuring alternatives on the other side of the blind panic that often creeps into these situations," said Glenn Reynolds, an analyst with CreditSights, a New York-based research firm. "He buys when others run scared, and he uses his leverage or even the fear of his leverage to effect change."

You can reach Bryce Hoffman at (313) 222-2443 or

© Copyright 2006 The Detroit News. All rights reserved.


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