Head up, Mike Hunter

Here's what's about to become of your beloved General Motors, Mr. Accountant. Might be torn apart by vultures. In 10 years, it *might* be the company you've fantasized about. Maybe.

October 11, 2005 For Big Three, All the Signs Are Warnings By DANNY HAKIM

DETROIT, Oct. 10 - Jerome B. York is looking over Rick Wagoner's shoulder, and that should make Mr. Wagoner nervous.

Mr. York, 66, is the point man for Kirk Kerkorian, the billionaire financier who in the last few months has become one of the largest shareholders in General Motors; Mr. Wagoner is G.M.'s chairman and chief executive.

Many analysts say they believe that Mr. York's emergence has put Mr. Wagoner's job security on the clock, because neither Mr. Kerkorian nor Mr. York is known for sitting on his hands. They are, in fact, reprising their roles of a decade ago, when Mr. Kerkorian was Chrysler's largest shareholder and turned to Mr. York to be his right-hand man in what became an unsuccessful and contentious takeover bid.

A spokeswoman for Tracinda, Mr. Kerkorian's private investment firm, said Mr. York would not comment for this article.

But several of G.M.'s assets are viewed as potentially expendable, people briefed on the situation said. Among them are parts of the General Motors Acceptance Corporation, G.M.'s large financial services division, including its insurance business and its mortgage business, pieces of which it has already sold.

The Saab brand is thought to not be worth further investment. Hummer is not seen as a core asset but one that should be sold.

And while there is an appreciation of the difficulties that G.M. faces, Tracinda is not expected to remain on the sidelines unless the company comes up with a more comprehensive turnaround strategy that refocuses G.M. on making fewer, but more desirable, car and truck models.

Tom Kowaleski, a spokesman for G.M., declined to comment on the company's relationship with Tracinda, but referring to Saab and Hummer, he said, "We believe both of those brands are core to our growth and our ability to bring in non-G.M. customers." Through the first month of sales of the new Hummer H3, 70 percent of the buyers have never been G.M. owners before, Mr. Kowaleski said.

Gerald C. Meyers, a professor at the University of Michigan business school, said of Tracinda, "If they think they're going to lose a big chunk of their investment, they'll be quite vocal, and there will be a sense of urgency."

At different times, both Mr. York and Mr. Wagoner have taken part in corporate role-playing exercises Professor Meyers has organized for his business school students.

"He cuts through like a surgeon," Professor Meyers said of Mr. York, who is a former chief financial officer of both Chrysler and I.B.M. "If you have a pile of numbers, he'll get right to the heart of things in a hurry, and he can make it hurt. Should Wagoner be worried? If the numbers don't speak friendly to a guy like York, it will become embarrassing. If you respond well to him, he can be a help."

G.M.'s standing was greatly complicated over the weekend by the bankruptcy filing of its former parts division, Delphi. G.M. agreed in its 1999 spinoff of Delphi to pay much of the medical, pension and life insurance benefits of Delphi retirees if the company filed for bankruptcy. G.M. said on Saturday that the filing could add as much as $11 billion to its future liabilities, more bad news for a company awash in red ink this year.

On Monday, reacting to the Delphi news, Standard & Poor's cut G.M.'s debt rating to BB-, three notches below investment grade, while Bank of America downgraded its rating on G.M.'s stock to sell. G.M. has already been battered by plummeting sales despite spending heavily on discounts, and its product lineup relies on sales of big sport utility vehicles and pickup trucks at a time when Americans are being pinched by gas prices.

G.M.'s shares plunged $2.81, or nearly 10 percent, to $25.48 in trading on Monday.

Ron Tadross, Bank of America's auto analyst, reckoned there was a 30 percent chance that G.M. would file for bankruptcy over the next two years, a more negative view than most of his colleagues on Wall Street have had. Most analysts say they think G.M. has sufficient resources to survive until September 2007, the deadline for a new labor contract, which could make or break the company.

"Time is of the essence for an owner like Kerkorian," said Mr. Tadross, adding that even in a best-case situation where the union made concessions, "if we hit a recession or the stock market is flat a few years, any combination of small-risk scenarios could make a $30 stock worth $15 or $20."

What does Tracinda have in mind for G.M.? Mr. Kerkorian's investment group has accumulated a nearly 10 percent stake in the company, as far as it can go without being considered an insider and submitting to a variety of regulatory requirements. But Tracinda has already indicated it might not remain passive, saying in a securities filing last month that it could seek a seat on G.M.'s board.

The company bought about 22 million shares between $25 and $27, nearly 19 million shares at $31, 8 million shares at $35, and a little over 5 million shares at $35.71.

"I think what Kerkorian will do is make sure he gets a guy on the board, and that could be Jerry, and he will start asking those tough questions and start prodding management," said Tom Gilman, a former top finance executive at Chrysler and a friend of Mr. York's.

Mr. York is a well-known figure in Detroit, having spent 14 years at Chrysler and having helped to turn around the company. He is known for being a tough cost-cutter, a numbers man bent on rigorous analysis.

"The combination of West Point discipline, M.I.T. analytical skills and University of Michigan business sense gives you a pretty good idea who Jerry York is," said Mr. Gilman.

In 1993, Mr. York was recruited by I.B.M.'s chief executive, Louis V. Gerstner Jr., when that company was in need of its own turnaround. Mr. York assigned hundreds of managers to cost-cutting task forces, with the goal of reaching various benchmarks set by the company's most efficient competitors. Among his achievements was turning over I.B.M.'s computer inventory 3.5 times a year, up from 2.8, which he estimated saved $2 billion.

"You've got to get people looking outside the company at customers and competitors," Mr. York said in a 1994 interview with The New York Times.

John R. Joyce, who worked with Mr. York at I.B.M. and who later also became chief financial officer, said, "if I was going to pick one word to describe him, it would be discipline."

"Whether or not you say he was too tough, I wouldn't say that, I can't say that, because that's what the organization needed at that time," he added.

Such was Mr. York's track record at I.B.M. that on the day his departure for Tracinda was announced in September 1995, I.B.M.'s stock fell 2 percent on a day that other computer stocks rallied.

Mr. York has also had his misses. He was part of a group that paid $725 million in 1999 for Micro Warehouse, a direct marketer of computers, and Mr. York served as chief executive of the company from 2000 to 2003, when it was sold to a competitor for just $22 million. It filed for bankruptcy shortly thereafter.

In Detroit, he is perhaps best known for taking part in what became a notably rancorous takeover attempt of Chrysler, after he joined Tracinda in

1995. Included among Mr. Kerkorian's group was the former Chrysler chairman, Lee A. Iacocca, who was persona non grata around Chrysler until his recent return as the company's television pitchman.

Several insiders, however, have said that the previous takeover attempt was not intended to be hostile, but only turned that way after a misunderstood

11th-hour phone call between Mr. Kerkorian and Robert J. Eaton, then Chrysler's chief executive, in which Mr. Kerkorian laid out the deal he was proposing.

"Bob Eaton said. 'Yeah, O.K., I'll take it to the board,' meaning 'I'll take it to the board and they'll probably say no,' and Kirk Kerkorian honestly believed that Bob Eaton was saying, 'I'll take it to the board and I'll recommend approval,' " said Robert A. Lutz, G.M.'s vice chairman, who was Chrysler's president during the takeover attempt.

"I think the most astonished guy in the world was Kirk Kerkorian the next day, when he got this, 'We categorically reject this; we will fight them on the beaches.' " He thought he was doing a friendly leveraged buyout with management, Mr. Lutz said, "and it turned out to be hostile."

Mr. Lutz sees Mr. Kerkorian as a bargain-hunting investor.

"He smells turnaround," he said recently to reporters. "He has an infallible instinct for getting in at the right time."

Mr. Gilman had a somewhat different take.

"Frankly, if you look at Kerkorian, his investment behavior is replicated in every investment that he does," he said. "Whether it's Western Airlines or MGM or Chrysler, he sees a large pool of cash sitting there with an indecisive management team and sees it as a chance to do one of three things," he added, referring to some of Mr. Kerkorian's previous high-profile investments.

"One would be, get the indecisive management team to start focusing on putting the money to work in the business, and in the auto business that means product, product, product. Or do a stock buyback program to drive up the share price. Or, if you're totally indecisive and can't even execute that, give it back to me in a dividend." He added: "Jerry will challenge you and analyze and challenge the management to explain the justification."

  • Copyright 2005 The New York Times Company
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