Kerkorian's GM (a.k.a. Greedy Mgmt.) Moves

Kirk Kerkorian has an inspiring story of a self-made man's perseverance, boldness and brilliance. (A good summary can be found in Wikipedia.) I have often told myself that he would be an investor to emulate. However, his investment decisions are extremely difficult to replicate without having his wonderful characteristics. His latest moves illustrate that point.

Yesterday it was announced that he increased his ownership in General Motors stock back to 9.9% the company (56 million shares or about $1.2 billion). His cost basis was nearly $31 and the stock is in the low 20's. There was speculation that his sale of 12 million shares last December was not really for tax purposes, but was his first in a series of reductions in a quasi-admission of a mistake. (I did not agree.) Now it's clear that it was for tax purposes and that he may purchase yet more at these lower prices.

Now here's the amazing part. I have not read of an unsuccessful investment by him. He has created his $8 billion net worth out of a great series of investment decisions. He's already made piles of money on a contrarian bet on Chrysler. So if he has a nearly perfect investment record, is within his area of competence, is putting 20% of his net worth in an investment that can be purchased for 35% less than he did, why not follow him in?

First, the pros of buying GM. Toyota, a company without the legacy and structural costs of GM, is valued at $183 billion and sells roughly the same amount of goods - $175 billion. GM, on the other hand, is valued at about $12 billion, even though it sells more goods than Toyota - $190 billion. If GM even got half the valuation of Toyota, it would increase eightfold - a wonderful return.

Next, the cons of buying GM. Ill-defined brands. High capital intensivity. Bankruptcy really a possibility. Delphi, the big GM parts company filed and few thought that would happen. Further, GM could lose lots of money if Delphi employees strike or force GM to pick up some of the Delphi post-retirement liabilities. GM's liabilities are huge. With over 2.5 retirees per active employee, GM pays about $6 billion per year in health care costs and has a pension which is possibly underfunded by billions.

Kirk Kerkorian has hired Jerry York to spearhead the turnaround. He was the CFO of Chrysler and IBM in their successful turnarounds. There is probably not a better person to work on GM. He says a key phrase in a recent speech (found in a 13D of Tracinda), "GM has a mountain of liquidity on hand—both cash and non-core assets that can be sold. So it has the wherewithal it fix itself." As a one to three year hold, GM stock has significant potential to appreciate. But, as a long term hold, the business is not attractive, even though there is clearly money to be made.