GM's New French Solution: Not Such a Hot Idea (GM)

Includes: GM, NSANY
by: Travis Johnson

As I wrote back in March, I seriously considered purchasing General Motors (NYSE:GM) corporate bonds. The prices were quite low and seemed to assume a high likelihood of bankruptcy. Martin Whitman at Third Avenue was writing about opening a GM debt position and looking for more.

It turns out, with GM's recent stock recover, that this would have been a good idea at least as a short term play. I didn't buy in at the time and I don't want to now, but I have been paying attention to the General Motors story.

And this latest development about a three way transnational merger of some sort has me a bit confused. I have to say, I'm with the CEO on this one. I can see why the board is being pressured into investigating this option, since Kirk Kerkorian wields such a heavy hand as a minority shareholder and it's more or less his idea, but I hope they don't go too far with it.

There was a good Steven Pearlstein column in Friday's Washington Post on this issue. Here are the two main points I got from the article:

1. The only thing Renault, Nissan (OTCPK:NSANY) and GM have in common is that they're all losing market share in their domestic markets.

2. When did merging with a major French company become a good solution for anyone?

I think it's key to note that what we'd be talking about with a Renault/Nissan/GM merger is a merger of companies that are all quite troubled -- and not because they're too small. GM is already doing better overseas than they are in the US, for the most part, so why merge with companies that are losing share in Japan and Europe.

If you want to hire Carlos Ghosn, try to hire him or throw some money at Nissan to get them to give him up -- but why on earth would he be able to solve GM's pension, car design and health benefit problems when other talented executives have so far failed? They're hard problems, they're going to take time and creativity to solve. Ghosn essentially helped to turn around Nissan by focusing on a few new car models, which seemed to work pretty well, for a while, for a small company that only had a few models. If it sounds familiar, it's the same thing Iacocca did at Chrysler with the K-car and the minivan.

That's not going to cut it for GM with their multitude of nameplates. They may need outside management, or different management, but I can't imagine there's any kind of quick fix in the cards for them.

No, this looks like the "quick, do something" management strategy at work -- do something to boost the stock price, not something that's going to help a business recover (that, after all, would be hard work, and probably wouldn't earn any extravagant bonuses or friends on Wall Street).

No, thanks.

And on the French front -- after seeing how major French companies, from Alstom to Airbus to Alcatel (ALA), have performed, and how much political pressure they face at home to remain employment agencies and French champions above all else, why would you want to sign yourself up for a slice of that pie? And hey, Alcatel's management can't have been feeling great about business if merging with Lucent (LU) seemed like a good idea. Is that where Renault's coming from?

GM debt may still be a good deal even at the reduced yield you'd get today, though I expect the share price will decline again once it becomes clear that merging three mediocre car companies is not going to create one great one. I still don't believe GM will go bankrupt, but I'll continue to watch this one from the sidelines.

GM 1-yr chart: