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Thursday, October 05, 2006

Details Of GM & Renault-Nissan Talks & A Look At Ford

By Yaser Anwar, CSC of Equity Investment Ideas

On September 20th 06, I told blog readers that, "Something fruitful hasn't come out of the Nissan deal that was being touted, yet. Investors should remain skeptical on the benefits of a Renault-Nissan alliance, though talks are said to be "constructive". Failure to reach an agreement paints a negative picture for GM shareholders."

Today GM announced the end of talks with Renault-Nissan on a potential alliance, a mutually agreed upon decision. I told readers to remain skeptical as (I didn't mention this part then) that the talks included a large number of hurdles that would need to be overcome.

According to GM’s statements during the conference call, the companies agreed that significant synergies could be obtained (which appear to have been weighted to the benefit of Renault-Nissan), but could not agree on the exact magnitude of synergies.

GM felt that it was inappropriate to enter into an alliance that was weighted to such a
degree to the other party without some form of compensation. Renault-Nissan felt “that the
principle of compensation is contrary to the spirit of any successful alliance”.

GM also indicated on its call that its board of directors voted unanimously to end the review of the potential alliance. GM said the alliance would have been a distraction from the ongoing restructuring program.

Tracinda, run by Kirk Kekorian released a statement expressing regret that GM’s board did not seek an independent analysis of the potential alliance. Indications that the alliance talks might fall though began to leak out last week at the Paris Auto Show.

Renault indicated that discussions with Ford could be possible. If these talks begin, it is uncertain whether these talks would lead to an alliance .

Even if an alliance occurs, significant synergies would be unlikely for quite a long time, in my view, given that Ford is already sharing product platforms with Volvo and Mazda, which creates complexities. Not to forget Ford saying it will be profitable in 2009 (ouch! for shareholders)

Ford is trading at a multiple of 8.5 at the moment on EPS estimate of $1.00. I believe that
the Ford should trade in the of 6-7 multiple range based on normalized EPS. Hence, I believe that Ford’s stock is currently overvalued.

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