MGM's Grand Plans

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Famed motion picture, music and merchandise company Metro-Goldwyn-Mayer (NYSE: MGM) last night issued a press release with an interesting headline: "MGM to Begin Evaluation of Alternatives to Share Some of Its Wealth With Public Shareholders."

Rather than get into a discussion of all the things I could do with MGM's $672 million in cash, I thought it might be more useful to discuss what's really going on here. While we've been writing quite a bit about dividends lately, that's not the issue at hand -- in fact, the company doesn't pay one and doesn't plan to.

What's being written is another chapter -- well, maybe more a section of a chapter -- of the fascinating career of investor Kirk Kerkorian, majority owner of MGM as well as a major investor in DaimlerChrysler (NYSE: DCX) and MGM Mirage (NYSE: MGG). A well-known "activist investor," Kerkorian is known for taking large stakes in companies and then trying to rally stockholders to get management to do one thing or another.

In the case of MGM -- of which he already owns some 67% -- he filed a "tender offer" to purchase shares from shareholders (people like you and me). He offered a nice premium to the market price at the time of the offer, which is ongoing and scheduled to close early next month. Management teams often advise stockholders with regard to such offers, but MGM's brass offered no opinion on this one. (Well, they probably weren't going to disagree with their majority owner.)

Now MGM says that it's considering options for what it can do with its cash following the end of the Kerkorian offer. (MGM stock jumped quickly toward his $16 per share offer once the news broke, making the deal unattractive for people who didn't get in quickly. It's unclear how many sold him their shares, and unlikely that he'll be committed to buy the full 15 million shares he agreed to take.)

Should MGM decide to act, the likely outcomes are a buyback or another tender offer. Both seem more than doable given the company's strong balance sheet. (Free cash flow has also been plentiful so far in 2003.) In the end, Kerkorian seems poised to get what he was looking for all along: a higher price for his shares, at a relatively small cost to himself. Sometimes having an activist investor as an ally can pay off.