Wednesday, November 08, 2006

Brian O'Connor: Market wants results, not deals

Thursday, October 05, 2006
Brian O'Connor: Market wants results, not deals

When it comes to Wall Street, the GM-Nissan-Renault alliance was a deal that was never going to happen. And the fact that it didn't doesn't make a dime's worth of difference.


After weeks of hoopla about alleged "synergies" to be "unlocked" from the terminated tie-up, GM stock closed Wednesday down a mere 9 cents.

When it comes to the aborted alliance with the folks who used to make the Alliance, Wall Street never believed the deal would happen or that it would make much difference to GM's value even if it did.

"This should not be a surprise to the market," said Shelly Lombard, senior analyst with Gimme Credit in New York. "Some people thought for a while that Kerkorian or market forces would force GM into it, but it ain't gonna happen."

GM stock gained more than $2 in June on the initial news that investor Kirk Kerkorian, who holds 9.9 percent of GM, was pushing the carmaker to study the alliance. But analysts who follow GM say that premium was priced out of the stock well before Wednesday's news.

Sales are what helped stock

Instead, they say GM's good news on second-quarter sales, combined with the 34,000 union buyouts and the pending sale of a stake in the GMAC financing unit, were the real reasons GM shares gained 74 percent so far this year.

Meanwhile, the obvious public sentiment on the part of GM management and chairman Rick Wagoner seemed to be solidly against the deal. Wagoner's initial success with his turnaround plan seemed to mute the point of any alliance.

"People have been skeptical about whether this would come to fruition for a while now," said Bradley Rubin, senior automotive trading analyst with BNP Paribas in New York.

The point of an alliance in terms of things like cost savings, weren't obvious to the market, Rubin added. As the world's largest automaker, GM already enjoys plenty of economies of scale, and neither Renault nor Nissan were going to help GM usher unionized autoworkers and their expensive contracts out the door.

"It didn't make any sense at all for GM and would complicate things in North America, not make it easier," Rubin said.

That's not to say Kerkorian's push for the alliance hasn't accomplished anything, analysts stress. Indeed, it helped put GM on notice that Wall Street demands changes in the automaker's cost structure.

"It held GM's and Wagoner's feet to the fire," Lombard said. But what activist investor Kerkorian wants to see is a goodly jump in share price. Since his big acquisition of GM shares in May 2005, the price has gained $3 to $4 per share. But with his recent announcement that he'd like to buy another 12 million shares, the 89-year-old Kerkorian obviously thinks the stock will grow.

"I think it's about gamesmanship and coming out a winner at the end," Rubin said. "He wants this to go to $40 or $50 a share, which it can, but he wants it to happen tomorrow because he might be dead."

Rubin said he wouldn't be surprised if Kerkorian's Tracinda Corp. already is preparing a lawsuit over the end of the alliance talks. Tracinda's statement that it regrets that GM didn't get an independent assessment might mean that the lawyers will get involved.

On the other hand, Kerkorian might just let the lapsed deal put more pressure on Wagoner.

"Maybe he will say to Wagoner what the rest of the market is saying: 'We aren't too upset with this deal going away as long as you can deliver,' " Lombard suggested.

Proposal was distracting

Delivering results won't have much to do with foreign alliances, but will turn on critical issues such as avoiding a strike at GM supplier-spin-off Delphi Corp., completing the GMAC sale, negotiating a new UAW contact next year and keeping earnings and sales heading up.

Beyond that, the alliance has been a distraction. "Everyone is paying attention to what's less important but sexier," Rubin said.

The bottom line is that fixing GM's cost structure and selling cars without gigantic discounts is what will decide GM's future.

The truth is that most mergers, acquisitions and other business combinations don't generate any of the profits promised to be spawned by the myth of "synergy."

Fortunately, another business truth played out first: the one that says most deals don't happen.

You can reach Money & Life Editor Brian O'Connor at (313) 222-2145 or

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