Saturday, October 28, 2006

GM ditches deal

Thursday, October 05, 2006
GM ditches deal
Talks over: Little gain seen in Renault-Nissan alliance; Fight brews: Kerkorian aide may resign from board
Bill Vlasic and Christine Tierney / The Detroit News

DETROIT -- General Motors Corp. turned its back Wednesday on an international alliance with Renault SA and Nissan Motor Co. and set the stage for a potential confrontation with billionaire GM shareholder Kirk Kerkorian.

The decision by GM to reject a Renault-Nissan deal could lead Jerry York, a top Kerkorian deputy, to resign from the GM board, according to people familiar with the situation.

While GM Chairman Rick Wagoner said GM's board had unanimously rejected a Renault-Nissan tie-up, York and Kerkorian were said to be in sharp disagreement with the automaker's decision to end the alliance talks.

If York decides to leave the board, he would be free to lead an aggressive push for change at GM and possibly launch a proxy fight to recast its board. Reached Wednesday night, York declined to comment on his plans.

Wagoner said the alliance benefits would have been heavily skewed toward Renault and Nissan, and GM could not afford to lose focus on its North American turnaround, which he said was gaining traction following a $10.6 billion loss in 2005.

"It would have potentially been a distraction to our current turnaround efforts," he said in a news conference at GM's headquarters in Detroit. "We felt the complexities of working with three companies could, in fact, slow us down."

But Kerkorian, owner of a 9.9 percent stake in GM, made it clear in a statement that he felt rebuked by the GM board's refusal to hire outside advisers to analyze the merits of an alliance with Renault-Nissan.

"We believe that General Motors' participation in a global alliance with Renault and Nissan would have enabled GM to realize substantial synergies and cost savings," said Tracinda Corp., Kerkorian's investment firm. "We regret the board did not obtain its own independent evaluation of the alliance."

The decision by GM, Renault and Nissan to terminate alliance talks Wednesday came after two-and-a-half months of intense, high-level negotiations led by Wagoner and Carlos Ghosn, chief executive of Renault and Nissan.

The talks, which were initiated in July by Kerkorian, broke down last week over major disputes as to how each of the three companies would benefit financially from a global alliance.

In a joint statement issued Wednesday, the three automakers said they "did not agree on either the total amount of aggregate synergies or the distribution of those benefits."

Wagoner said GM believed it would receive far less value from an alliance than Renault and Nissan. He also said that Renault-Nissan refused to pay a premium price for a significant minority stake in GM.

"When you added it up, it wasn't a good value for GM shareholders," Wagoner said.

GM shares plunged as much as 5.2 percent on initial reports of the end of talks, but rebounded later in the day Wednesday to close down 9 cents to $33.32 in trading on the New York Stock Exchange.

Industry analysts said the termination of negotiations was not surprising, particularly after Wagoner downplayed the benefits of an alliance after meeting with Ghosn last week at the Paris Auto Show.

What's next?

But Wall Street wondered aloud what Kerkorian may do next to force change at GM.

"The major question now is will Kirk Kerkorian exert greater pressure on (GM) to form an alliancepossibly in a proxy fight," said John Murphy of Merrill Lynch.

Kerkorian has indicated he may boost his stake in GM to 12 percent.

The 89-year-old financier, who attempted an unsuccessful takeover of Chrysler Corp. in 1995, could then try to rally other large shareholders to support changes in GM's management or its board.

Talks snag over purchasing

The alliance talks had riveted the automotive world since mid-July, when Wagoner and Ghosn agreed to a 90-day study of the merits of GM joining the partnership that Renault and Nissan formed in 1999.

But the talks snagged quickly on questions of how each automaker would benefit financially from sharing costs for parts purchasing and vehicle development.

As The Detroit News first reported last month, the two sides could not agree on the potential savings in the important area of parts purchasing.

Nissan and Renault officials complained behind the scenes that their GM counterparts appeared to be against an alliance from the start.

GM countered that it negotiated in good faith but came to believe it was not a good deal for its shareholders.

One person familiar with the negotiations said GM calculated it would save $1 for every $3 saved by Renault and Nissan.

Moreover, GM executives balked at Renault-Nissan's refusal to pay a premium price to acquire a significant minority stake -- estimated at 20 percent -- in GM.

GM's investment banking advisors, Goldman Sachs and Morgan Stanley, recommended seeking a premium because the Renault-Nissan stake could have prevented GM from entering joint ventures with other automakers.

"Renault-Nissan made it clear they would not pay any market premium, not compensate GM to balance the disproportionate impact of expected synergies," Wagoner said.

The issues came to a head last week at the summit meeting of Wagoner and Ghosn in Paris. When GM essentially demanded to be paid to join the alliance, the deal was as good as dead, according to a source close to Renault-Nissan.

"The key problem was the principle of compensation," said the source.

"You can't run an alliance if one of the companies is asking for payment in order to take part in the relationship."

Kerkorian intervenes

With the talks faltering, Kerkorian intervened last week by suggesting in a U.S. Securities and Exchange Commission filing that the GM board have independent advisers analyze the proposed alliance.

But when the GM board met Tuesday in Detroit, there was minimal discussion of hiring outsiders to look at the deal, as Kerkorian had requested, according to people familiar with the meeting.

Instead, the 12-member board -- which is headed by Wagoner -- decided to drop out of the negotiations altogether.

Wagoner informed Ghosn of the GM board's decision in a telephone call Wednesday.

Wagoner described the conversation as "cordial and to the point."

Ghosn was not available for comment, but in past statements said he would not try to force an alliance with GM if the company's management did not want the deal.

Enter Ford?

He also indicated he would look elsewhere for a North American partner if the GM talks failed.

In addition to its joint statement, Renault and Nissan added that it still believes "there is significant value creation through expanding an alliance to a motivated North American partner," which would most likely be Ford Motor Co.

While Ghosn and Ford have had discussions in the past, people close to Ford told The News that the No. 2 U.S. automaker has little interest in hooking up with Renault-Nissan.

Ford's shares had their biggest gain in three weeks, rising 33 cents, or 4 percent, to $8.56.

You can reach Bill Vlasic at (313) 222-2152 or

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