Market Observations with Rob Kirby

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GM Revved Up on Merger Talk

by Rob Kirby, Kirby Analytics. July 3, 2006

General Motors shares surged more than 8 % on Friday when their largest shareholder [owning 9.9% of GM's common stock], Kirk Kerkorian,

"...proposed that the world's largest automaker team with Japan's Nissan Motor and Renault of France in a bid to boost profits and cut costs."

Whether or not a three way merger between the auto giants makes sense remains to be seen, but, as some pundits have been quick to point out Monday morning in the broadcast media, General Motors' financial ills stem largely / mostly from legacy costs which have already been discussed at length in this space.

While any proposed merger may perhaps delay or prevent a G.M. bankruptcy filing; its completion would also logically and likely involve - at a bare minimum - the elimination of a swath of white collar jobs in America, further hollowing the fast contracting middle class. Looking further out, if precedents from other industries repeat themselves, if control of the American auto giant is effectively ceded to foreigners - one might envision most if not all production would ultimately be moved to lower wage jurisdictions.

Food For Thought

It was just last year when China's CNOOC was rebuffed in its attempt to take over UNOCAL, it was denied in the name of "national security". Folks with good memories might remember,

At one point GM was the largest corporation ever in the United States, in terms of its revenues as a percent of GDP. In 1953 Charles Erwin Wilson, then GM president, was named by Eisenhower as Secretary of Defense. When he was asked during the hearings before the Senate Armed Services Committee if as secretary of defense he could make a decision adverse to the interests of General Motors, Wilson answered affirmatively but added that he could not conceive of such a situation "because for years I thought what was good for the country was good for General Motors and vice versa".

How Far We've Come And Where From Here?

One plausible alternative, while painful, could perhaps involve an immediate bankruptcy filing and a "made in America solution" ensuring that some semblance of a North American Controlled Auto Industry is maintained. Admittedly provocative, but G.M. still possesses a great deal of cash resources on the balance sheet. As an investment banker friend of mine recently pointed out, "if a bankruptcy filing is "likely" or inevitable - being proactive while you still have ample cash resources gives you a bigger voice at the bargaining table when reorganization talks begin".

Is it just me, or does anyone else find it rather convenient that Mr. Kirkorian has proposed this merger? Long known as a "corporate raider" - Kerkorian has been compared to a high stakes gambler,

"Like a roulette player who sticks with the same number, Kirk Kerkorian is betting on Detroit again."

Will Kerkorian ultimately end up spinning his wheels with his latest proposal? We should all remember he's only repeating what worked for him in the past,

The reclusive 82-year-old billionaire gambled on Chrysler Corp. in the late 1980s and early '90s when he became the struggling automaker's biggest shareholder.

While his audacious attempt to take over the automaker failed, his investment still paid off in a big way when Chrysler rebounded and merged with Germany's Daimler-Benz AG.

Perhaps it’s more a case of what's good for Mr. Kerkorian is good for General Motors but not necessarily visa versa?

Whether or not Kerkorian's latest gambit [or exit strategy, perhaps?] is successful or not, isn't interesting how history always seems to have a way of repeating itself?

Today's Market

Overseas equity markets began the week on a positive note with Japan's Nikkei Index gaining 66 points to close at 15,571. North American Equities, which closed early today, also did better with the DOW up 77.80 to 11,228.02, the NASDAQ up 18.34 to 2,190.43 and the S & P ahead by 9.99 to close at 1,280.19. NYMEX was closed Monday - crude closed Friday at 73.93 per barrel.

On foreign exchange markets, the U.S. Dollar Index eked out a gain of .03 to close at 84.93.

Interest rates were unchanged from Friday [2 yr. 5.17 %, 5 yr. 5.11 % and 10 yr. 5.15 %] with the bond markets closed today.

Precious metals did better in overseas trade [COMEX was closed] with London gold futures up 10.30 to 624.40 per ounce while silver futures gained .31 to 11.38 per ounce. The XAU Index gained 5.86 to 149.46 while the HUI added 13.90 to close at 351.08.

U.S. financial markets are closed tomorrow in observance of Independence Day. Wishing all of our American friends the most enjoyable July 4th and everyone a pleasant and pleasurable evening!

Rob Kirby

© 2006 Rob Kirby

Contact Information

Rob Kirby | Proprietor, Kirby Analytics Newsletter - Proprietary Macroeconomic Research
Toronto, Ontario, Canada | Observations | FSU Editorials | E-mail

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