“Drop the money-losing hobby”

We’ve had a few cynical comments on the GM / Kerkorian affaire.

John Mauldin has an interesting and opposing take. Its worth seeing a different take on the issue, and John does a nice job with it here: A Stable Disequilibrium. Its buried in the middle of a lengthy piece; Here is the relevant excerpt:

"I find it interesting that that old corporate raider, Kirk Kerkorian, is now on the prowl for General Motors. At first glance it seems like this 87 year-old gentleman has finally lost his marbles. The company is by definition a stable disequilibrium. When the divorce begins between the shareholders, bondholders, unions and retirees, it will make a Donald Trump divorce look like child’s play.

However, I don’t think I would bet against Kerkorian just yet. He’s got all the money that he could possibly spend, but there’s a lot more than money riding on this deal. If he can somehow pull something out of the fire that is General Motors, it will be a deal for the ages. It will get him more than a few footnotes in history, and that is the only thing he doesn’t have now. I’m not privy to his personal counsel, but I think I see a rhyme in his actions. Basically, General Motors is an auto and mortgage finance company that builds cars as a hobby. A hobby, I should point out, that loses a lot of money.

If you could get rid of that money-losing hobby along with the pension and health care commitments, General Motors is actually worth quite a lot of money. Substantially more than Kerkorian is now paying. Watch for him to start agitating for General Motors to spin off their finance divisions. Then watch for the car division to file bankruptcy. Those shareholders get screwed, but they more than make up for it with the profits on the financial subsidiaries. The pension and health benefits get renegotiated and General Motors survives.

Perhaps more benignly Kerkorian may suggest that the board simply give the auto manufacturing portion of the Company to the unions. Kerkorian takes some of the debt in exchange for the finance operations, throws in a few incentive clauses here and there, and voila! Kerkorian walks away with another billion or so, along with a few footnotes.

And now back to our regular story.

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