GM board tension rises

The Baltimore Sun

General Motors Corp. director Jerome York abruptly resigned from the board yesterday while his ally, billionaire investor Kirk Kerkorian, dropped a plan to add up to 12 million GM shares to his 9.9 percent stake in the company.

The moves could set the stage for a bid by Kerkorian - GM's fourth-largest investor - to run his own slate of candidates for the automaker's board next year.

Kerkorian, 88, and York, 68, acted three days after GM's board voted to end talks with Renault SA and Nissan Motor Co. aimed at exploring York's proposal for an alliance of the three automakers.

Although York had voted with the rest of the board to end the talks, he said in his letter of resignation, dated yesterday, that he was not happy with the way GM had analyzed the potential benefits of an alliance.

York also said in the letter, a copy of which was obtained by the Los Angeles Times, that he was not stepping down because of the board vote but because he believes directors were too cozy with GM's management.

York, a top aide to Kerkorian, was elected to GM's board in February at the investor's request. He has an agreement with Kerkorian's investment company, Tracinda Corp., that guarantees him 4 percent of whatever profit Tracinda makes on its GM investment, to be calculated in 2009.

Yesterday's moves sent the company's stock down $2.08 a share to close at $31.05, its biggest decline since the end of June.

GM has been losing sales in the United States for decades to Toyota Motor Corp. and other foreign automakers. It has been saddled with huge health care, retirement and payroll costs inked in generous contracts with the United Auto Workers union.

Chief Executive Officer G. Richard Wagoner Jr. has said that these so-called legacy costs add $1,500 to the cost of each vehicle GM builds in the United States, costs that foreign manufacturers don't bear.

The company lost $10.6 billion last year as its U.S. market share sunk to an 80-year low. Wagoner put together a turnaround plan that calls for GM to close 14 North American plants, slashing its manufacturing payrolls in the U.S. and Canada by about 35,000 jobs over the next few years. GM has since negotiated with the labor union substantial savings on future medical costs.

Wagoner says the moves will save GM $9 billion a year.

Wall Street saw Kerkorian's and York's actions yesterday as a vote of no confidence from a knowledgeable team.

But Kerkorian left open the option - in a regulatory filing yesterday - of acquiring more GM shares through his Beverly Hills, Calif.-based Tracinda company if market conditions improve.

That could happen next month if GM reports improved third-quarter earnings, as Wagoner hinted in comments earlier this week.

"The company has made enough progress recently to begin a legitimate turnaround and there should be more good news to come," GimmeCredit bond analyst Shelly Lombard wrote in a note to investors Thursday.

"We will be watching third- and fourth-quarter results closely to determine if Rick Wagoner can deliver the results he promised he could deliver without the alliance," she said.

Yesterday's plunging stock price reduced the value of Kerkorian's 56 million GM shares by almost $116.5 million. But that's still about $45 million above his initial $1.69 billion investment.

GM's stock price would have to fall below $30.24 - the average acquisition price Tracinda reported for the shares in a regulatory filing earlier this year - for Kerkorian to start booking a loss.

Many analysts believe that the investor will hang onto his stake and mount a proxy battle to unseat GM's board at next year's June annual meeting.

"Kerkorian is unlikely to bail on his investment, that's not his style," said Ken Elias, partner at automotive industry research firm Maryann Keller & Associates. "He may go the proxy fight route."

A spokeswoman for Kerkorian said there would be no comment from the investor, York or Tracinda beyond the investment company's SEC filing yesterday.

Some analysts have suggested that York and Kerkorian prodded GM to speed up efforts to recover from last year's $10.6 billion loss and decades of declining U.S. sales.

Others, though, have seen the two as gadflies, distracting GM management from the job of implementing a recovery plan that Wagoner had developed before Kerkorian began amassing shares last year.

Wagoner told the Times in an interview Aug. 7 that he had become concerned over leaks of sensitive board information and hinted that York was behind them.

"Notwithstanding Wall Street's reaction, I think there's rejoicing internally at GM that now that they can get back to business," said Burnham Securities analyst David Healey, who recently acquired a personal holding in GM stock.

York, he said, "had some good ideas and may have pushed GM to speed things up, but he also is impatient and disruptive."

York's tenure on GM's board "may have had some impact, but his absence probably won't hurt things going forward," said David Cole, chairman of the nonprofit Center for Automotive Research in Ann Arbor, Mich. "GM's progress so far has been pretty amazing."

In his letter of resignation, addressed to GM's lead director, George Fisher, York said that although GM has made progress in cutting operating costs, he doesn't believe the company has done enough.

York also wrote that he believes GM directors should have hired an independent financial adviser to counsel them on his alliance proposal rather than relying solely on GM management recommendations.

He did not address his reasons for voting with other board members to end the talks. But he wrote that "while from a narrow legal perspective the company may have properly conducted its assessment of the potential benefits of the alliance, there was certainly not a 'meeting of the minds' regarding my views as to how the study was conducted."

York wrote that he "thought I made that clear in the executive session at the end of the board meeting, but apparently I didn't."

He said he was quitting because, "I haven't found an environment in the board room that is very receptive to probing much beyond the materials provided by management."

By stepping off the board, York has more freedom as Kerkorian's top aide to publicly criticize and discuss GM and to pursue any battle Kerkorian might launch, said industry analyst George Magliano of Global Insight, a Boston-based economic forecasting and consulting firm.

A bid by Kerkorian to take control of GM's board isn't out of the question.

He teamed with York, a former top Chrysler Corp. financial executive, in an unsuccessful 1995 attempt to gain control of that company.

Kerkorian held onto his shares when the effort failed, and later made a $2.7 billion profit when Chrysler was sold to Germany's Daimler-Benz, resulting in the formation of the present DaimlerChrysler AG.

John O'Dell writes for the Los Angeles Times.

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