As GM, and Renault-Nissan prepare to pursue â€œexploratoryâ€ talks about a possible alliance, GM investors are wondering whether the partnership can benefit the world largest automaker, currently in the midst of a major restructuring.
While the company has had success in overseas markets, especially in China, its failure in the U.S car market has created frustration among stock holders. In 2005, nearly 77 percent of its net loss was attributed to its North American segment.
Among the shareholders showing concern is Kirk Kerkorian, president of Tracinda Corp. a private equity firm which owns a 9.9 percent stake in GM. His group is one of the top four shareholders in the company. The groupâ€™s influence also extends to the board room where Jerry York, his adviser, has a seat. York is a former Chief Financial Officer of Chrysler.
The board members from each corporation have given their respective CEOs the authority to speak for the company regarding the alliance. This week, the head of GM, Rick Wagoner and the head of Renault and Nissan, Carlos Ghosn, are scheduled to begin preliminary talks.
GM, which was founded in 1908, has a presence in 33 countries and has long been known for its leadership in car production. However, the success of Toyota in recent years could mean that GM could soon lose its title as the worldâ€™s biggest carmaker.
GM is fresh off a $10.6 billion loss for 2005. In May, Standard & Poorâ€™s credit ratings agency has downgraded GM bonds to â€˜junk status.â€™ Meanwhile, the company stated in its annual report that it has a $298.1 billion in debt with interest liabilities costing the company $12 billion per year.
In addition, GMâ€™s market share shrunk nearly 2 percent to 25.9 percent last year amid softening demand for large cars including SUVs, which are GMâ€™s most profitable vehicles.
The current top three U.S. carmakers, GM, Ford and Daimler Chrysler are facing tougher competition from Toyota and Honda, which are producing more fuel efficient cars at lower costs.
To counter the threats, Wagoner has recently implemented cost savings which include cutting executive pay, reducing dividend payments and buying out the contracts of over 35,000 union employees
These measures have raised the share price but it hasnâ€™t been quick enough for Kerkorian, who proposed the alliance in a public letter through Tracinda.
Investors greeted with news with a cheer as stock prices rose nearly 8 percent. While details have not yet been determined, some analysts applauded the proposed talks.
Efraim Levy an equity research analyst from Standard & Poorâ€™s, felt the deal would be beneficial for the three parties involved due to the marketing and purchasing synergies achieved by each party.
Deutsche Bank also supported the proposition, noting that Ghosn - well-known for helping turn around Nissan - would have a positive influence on GM were he allowed to have a vote on the companyâ€™s board.
The immediate advantage for the firm is the injection of cash flow to the tune of $3.3 billion in exchange for Renault and Nissan taking a 10 percent ownership stakes, according to press reports in Paris.
Taking a long term perceptive, if the alliance is approved the new mega-entity will make 15 million cars. The new market share for Europe will be 23 percent while in the US its share will be 32.5 percent.
Alliance â€“ Good news?
Fitch Ratings stated that the inclusion of Ghosn in GMâ€™ board would have minimal impact on one of its biggest expenses â€“ the inflexibility of the companyâ€™s contract with the United Auto Workers union. The contract stipulated a fixed pension and generous health plans that have crippled the company.
Health costs in 2004 were $5.2 billion for medical benefits for more than 1.1 million workers and retirees.
To some Ghosn has already too much on his plate. Running two multibillion dollar companies with the addition of a third would be difficult.
â€œHe is not Supermanâ€¦GM is big and complex....if you do not have 25 years at GM learning the quirks of the organization, the unions and the suppliers...this is not a game you can easily learn, Jim Hossack, an industry analyst with AutoPacific said.