Kerkorian breaks new ground at GM
NEW YORK — One of General Motors Corp.’s biggest investors proposed something last week that came as a shock to many in these times when greed often rules: He’s willing to give up guaranteed cash for the sake of trying to put the struggling company’s business back on track.
An aide to billionaire Kirk Kerkorian, who owns 7.8 percent of GM stock, called on the automaker to chop its $2 dividend in half. While that would take $44 million out of Kerkorian’s pocket annually, it would save GM $566 million a year — something that could significantly help its financial health.
That’s hardly business as usual for most of today’s large investors, many of whom seem more interested in securing quick returns to enhance their portfolio performance than in positioning companies for longer-term success.
In a speech before the start of the North American International Auto Show, top Kerkorian lieutenant Jerry York gave a frank critique of GM’s turnaround plan. It marked the first time anyone associated with Kerkorian or his investment firm, Tracinda Corp., has openly discussed the situation at GM.
Kerkorian can’t be thrilled with the automaker’s performance over the last year. GM has failed to boost slumping sales, especially of gas-guzzling SUVs, while it wrestles with higher labor costs. It lost nearly $4 billion in the first nine months of last year.
York noted that GM’s recent announcement that it would slash 30,000 jobs and close 12 facilities by 2008 was a significant first step to the company’s turnaround. Still, he said more needs to be done — and that for change to really happen, investors, executives and rank-and-file employees have to be willing to help.
“This situation calls for the company’s going into crisis mode, adopting a degree of urgency that recognizes if things don’t break right, the unthinkable could happen, that time is of the essence,” York said.
Among the suggestions: Ask board members to work for less than the $200,000 a year they are currently paid, and slash the compensation of the company’s top five executives. York also said that GM should seek wage concessions from United Auto Workers members, who he said might be more willing to accept pay cuts if they saw them happening up and down the company’s ranks.
And then there is the idea of cutting the $2 dividend to $1. “I believe the shareholders will support reducing the dividend as part of an equality of sacrifice plan that can increase the value of their shares over time,” York said.
It wouldn’t be the first time that Kerkorian has been willing to take a long-term view. He has long pushed automakers and other companies to take steps that ultimately enhance the value of his holdings.
But what makes his efforts now so different is that the trend in corporate America seems to be going the other way. Waiting for shareholder value isn’t in vogue these days among big investors.
Of course, one can’t forget Kerkorian’s ultimate goal in all this is to make money. He certainly isn’t just leaving money on the table out of the goodness of his heart. What he seems to believe is that by giving up the dividend payments, that may boost his chances of recouping more should the stock price surge if GM begins to turn itself around.
It’s a gamble that could backfire, of course, if a dividend cut sends GM shares into a new freefall. But one at least one particularly savvy investor believes the risk is worth taking.