The head of Britain's largest manufacturing trade union has warned that General Motors is not "too big to fail" as concern over the future of the iconic American car manufacturer, which employs 5,000 workers in Britain, continues to grow.
By James Quinn, Wall Street CorrespondentLast Updated: 9:59AM GMT 12 Nov 2008
The Vauxhall motif on a vehicle Photo: AP
GM shares on Tuesday slumped to a 65-year low as analysts questioned the company's liquidity position after it admitted late last week that it may have run out of money by the end of the year.
One hedge fund manager even went so far as to say that GM should be allowed to fail, while an automotive analyst effectively said the company was worthless, placing a price target of zero on the company's shares.
Tony Woodley, joint general secretary of super-union Unite, believes that the collapse of GM, which operates under the Vauxhall brand in the UK, would be a "catastrophe" not just for the US and UK economies, but for the global automotive sector as a whole.
Mr Woodley, himself a former Vauxhall worker, told The Daily Telegraph that if GM were to enter Chapter 11 bankruptcy protection it would have an "immediate effect" on Vauxhall plants at Luton and Ellesmere Port and GM sites across Europe.
"I don't think anything is too big to fail. It's a question that it's too important both for historical and real corporate capital sense that GM must not be seen to fail in the States."
Mr Woodley added that in the same way that it was the right thing to keep financial institutions solvent by nationalisation, the US government should take a similar view regarding the major car manufacturers.
The trade union leader is spear-heading British efforts to ensure the US government injects money into GM and the other troubled US car manufacturers, and raised the subject with the new Business Secretary Lord Mandelson's during a meeting on Monday.
Mr Woodley was on Tuesday trying to contact United Auto Workers union head Ron Gettelfinger in the US, to discuss the situation and come up with some form of co-ordinated response.
In New York, GM's shares slumped below $3 for the first time since April 1943, but rallied slightly before closing down 44 cents at $2.92, as analysts continued to voice concerns about the company.
Mark Oline of credit agency Fitch, said that "strategic bankruptcy" was not an option for GM: "This is an issue of operating or not operating.''
Hedge fund manager Bill Ackman of Pershing Square said GM should be allowed to fail, and that the company should enact a pre-packaged bankruptcy.
His comments came as Deutsche Bank's Rod Lache placed a zero price target on GM's shares.
The future of GM and the rest of the car industry was one of the subjects discussed by President-elect Barack Obama and outgoing President George W Bush during their meeting at the White House on Monday, during which Mr Obama pleaded for urgent aid for the car manufacturers.
The conversation came as a letter was sent by Democratic leaders in the Congress to US Treasury Secretary Hank Paulson, asking him to provide money to the companies under the $700bn Troubled Assets Relief Programme. (TARP)
A GM spokesman said: "Bankruptcy is not an option for GM, as it creates more problems than it solves," before going on to stress that the company is involved in freeing up $20bn of capital through cost cutting measures and asset sales.
"GM has taken a host of self-help actions," the spokesman continued. "But additional support from the US government to aid the overall industry is essential, in whatever form it takes."
Wednesday, November 12, 2008
GM, Circuit City face financial fallout
CREDIT CRUNCH: The US automaker needs federal help now, its CEO and analysts say, while Circuit City became the first major retailer to seek bankruptcy protection AFP AND BLOOMBERG, NEW YORK Wednesday, Nov 12, 2008, Page 10
Children ride their bikes in front of an abandoned Circuit City store in Chicago, Illinois, on Monday. The US’ second-largest consumer electronics retailer filed for Chapter 11 bankruptcy protection on Monday.PHOTO: AFPThe global financial crisis closed in on two more victims yesterday after General Motors said it would need a government rescue and major US electronics retailer Circuit City filed for bankruptcy.
The news capped another day of gloomy developments in the US, the world’s largest economy, undermining hopes that coordinated action by governments around the world could keep the global downturn from getting worse.Fannie Mae, the US mortgage giant bailed out by the government earlier this year, posted a US$29 billion loss. Meanwhile the US expanded its bailout of insurer AIG to more than US$150 billion.General Motors CEO Rick Wagoner said the US automaker would need state help before president-elect Barack Obama takes over the White House in January, telling industry publication Automotive News that time was of the essence.“This is an issue that needs to be addressed urgently,” he said, calling on the government to “overshoot, not undershoot” the level of assistance.His call for support came as GM shares lost 23 percent on Monday after analysts at Deutsche Bank said they expected the stock eventually to be worth nothing at all.“Even if GM succeeds in averting a bankruptcy, we believe that the company’s future path is likely to be bankruptcy-like,” the bank said.Only federal aid can prevent a collapse by the largest US automaker, analysts including Buckingham Research Group’s Joseph Amaturo said on Monday as the shares plunged to a 59-year low. Reorganizing in court protection also may not be possible, because the credit crunch has dried up financing.“Strategic bankruptcy is not an option for GM,” said Mark Oline, a credit analyst with Fitch Inc in Chicago. “This is an issue of operating or not operating.”The prospect of a forced liquidation raises the stakes for GM’s quest for new federal borrowing after saying on Nov. 7 it may run out of operating cash as soon as year’s end. GM had US$16.2 billion on hand as of Sept. 30, down from US$21 billion at the end of June, and needs US$11 billion to pay its monthly bills.“A bankruptcy wouldn’t address our immediate liquidity concerns,” said Renee Rashid-Merem, a spokeswoman for GM. “It’s not an option for GM because it creates more problems than it solves.”Wagoner said the entire US auto industry was suffering, with sales expected to be down by more than 3 million vehicles next year in the face of the global economic downturn.“I’d question whether the US industry as a whole could survive that without support,” he said.US electronics retailer Circuit City said on Monday it had filed for bankruptcy protection and obtained a US$1.1 billion credit lifeline to battle a sharp decline in sales.Just a week after announcing it would close 155 stores and take other restructuring measures to fight a cash crunch, the firm became the first major US retailer to file for bankruptcy protection since the crisis began.Canadian telecommunications equipment provider Nortel Networks posted a third-quarter loss of US$3.4 billion and announced 1,300 job cuts.“We have seen worsening economic conditions, together with extreme volatility in the financial, foreign exchange and credit markets globally,” Nortel president and chief executive Mike Zafirovski said in a statement.The latest gloomy company news came ahead of emergency talks among the leaders of the G20 group of largest developed and emerging nations in Washington on Saturday aimed at restoring market confidence and stability.Washington officials have said that the summit is likely to result in an “action plan” including short-term steps to help fix the global economy.However, other countries, notably France, have pushed for the talks to agree concrete steps.
Children ride their bikes in front of an abandoned Circuit City store in Chicago, Illinois, on Monday. The US’ second-largest consumer electronics retailer filed for Chapter 11 bankruptcy protection on Monday.PHOTO: AFPThe global financial crisis closed in on two more victims yesterday after General Motors said it would need a government rescue and major US electronics retailer Circuit City filed for bankruptcy.
The news capped another day of gloomy developments in the US, the world’s largest economy, undermining hopes that coordinated action by governments around the world could keep the global downturn from getting worse.Fannie Mae, the US mortgage giant bailed out by the government earlier this year, posted a US$29 billion loss. Meanwhile the US expanded its bailout of insurer AIG to more than US$150 billion.General Motors CEO Rick Wagoner said the US automaker would need state help before president-elect Barack Obama takes over the White House in January, telling industry publication Automotive News that time was of the essence.“This is an issue that needs to be addressed urgently,” he said, calling on the government to “overshoot, not undershoot” the level of assistance.His call for support came as GM shares lost 23 percent on Monday after analysts at Deutsche Bank said they expected the stock eventually to be worth nothing at all.“Even if GM succeeds in averting a bankruptcy, we believe that the company’s future path is likely to be bankruptcy-like,” the bank said.Only federal aid can prevent a collapse by the largest US automaker, analysts including Buckingham Research Group’s Joseph Amaturo said on Monday as the shares plunged to a 59-year low. Reorganizing in court protection also may not be possible, because the credit crunch has dried up financing.“Strategic bankruptcy is not an option for GM,” said Mark Oline, a credit analyst with Fitch Inc in Chicago. “This is an issue of operating or not operating.”The prospect of a forced liquidation raises the stakes for GM’s quest for new federal borrowing after saying on Nov. 7 it may run out of operating cash as soon as year’s end. GM had US$16.2 billion on hand as of Sept. 30, down from US$21 billion at the end of June, and needs US$11 billion to pay its monthly bills.“A bankruptcy wouldn’t address our immediate liquidity concerns,” said Renee Rashid-Merem, a spokeswoman for GM. “It’s not an option for GM because it creates more problems than it solves.”Wagoner said the entire US auto industry was suffering, with sales expected to be down by more than 3 million vehicles next year in the face of the global economic downturn.“I’d question whether the US industry as a whole could survive that without support,” he said.US electronics retailer Circuit City said on Monday it had filed for bankruptcy protection and obtained a US$1.1 billion credit lifeline to battle a sharp decline in sales.Just a week after announcing it would close 155 stores and take other restructuring measures to fight a cash crunch, the firm became the first major US retailer to file for bankruptcy protection since the crisis began.Canadian telecommunications equipment provider Nortel Networks posted a third-quarter loss of US$3.4 billion and announced 1,300 job cuts.“We have seen worsening economic conditions, together with extreme volatility in the financial, foreign exchange and credit markets globally,” Nortel president and chief executive Mike Zafirovski said in a statement.The latest gloomy company news came ahead of emergency talks among the leaders of the G20 group of largest developed and emerging nations in Washington on Saturday aimed at restoring market confidence and stability.Washington officials have said that the summit is likely to result in an “action plan” including short-term steps to help fix the global economy.However, other countries, notably France, have pushed for the talks to agree concrete steps.
GM: The Threat of Bankruptcy
GM's senior management, business experts, and some members of Congress think letting the automaker go Chapter 11 would be a disaster
By David Kiley
GM Chairman and CEO G. Richard Wagoner Jr. Getty Images
View Slide Show
Over the past several days, while General Motors (GM) Chairman and Chief Executive G. Richard Wagoner Jr. has repeated his mantra that "bankruptcy is not an option," the specter of a Chapter 11 reorganization is circling GM's downtown Detroit headquarters like vultures.
When it reported its third-quarter earnings on Nov. 7, GM said that it may face cash reserve levels (BusinessWeek.com, 11/7/08) by the New Year that would put it at the threshold needed just to meet payroll and continue some level of normal operations.
It has already suspended most of its future product programs. It has stepped up the pressure on the White House and Congress, especially the Michigan caucus, to find a way to get government help. "The third-quarter results made it clear that, without government intervention, GM is headed for bankruptcy," Gimme Credit auto analyst Shelly Lombard said.
Circuit City Isn't a Model
Bankruptcy lawyers say the automaker could benefit from a prepackaged bankruptcy, which would be a reorganization that is worked out among the automaker's creditors before the case ever gets to a bankruptcy court judge. "It would be messy but ultimately could help the company restructure itself a lot faster," says Mark Bane, a partner at New York law firm Ropes & Gray.
The biggest obstacle to any bankruptcy is the lack of availability of debtor-in-possession (DIP) financing, which is liquidity normally provided by banks and private equity firms that a company in bankruptcy needs to reorganize itself. Indeed, the question of bankruptcy has been on the minds of GM's top executives. On Nov. 6, GM North America President Troy Clarke told a gathering of auto suppliers that obtaining DIP financing would be "practically impossible" given the state of the credit markets and the size of GM's obligations. "But that's where the government could come in," says attorney Bane, "providing the liquidity GM would need to massively reorganize under Chapter 11."
The worst-case scenario for GM, say most experts, is a spontaneous Chapter 11, like the one filed by electronics retailer Circuit City (CCTYQ.PK) on Nov. 10. But a prepackaged filing could be set up to make sure that the vast majority of auto suppliers would continue to get paid on time.
Hoping for Liquidity
Others disagree. Kimberly Rodriguez, a partner at Grant Thornton, an accounting and management consulting firm that works with auto companies and suppliers, says bankruptcy is a "last resort." Rodriguez says that in better times GM and Ford (F) have provided liquidity to its biggest suppliers who would have otherwise been forced into Chapter 11, which is very messy and destructive. "The government could play that same role for GM, and it will be a lot more orderly," says Rodriguez.
Aides to House Speaker Nancy Pelosi (D-Calif.) said on Tuesday, Nov. 11, that the Speaker, whose congressional district is in San Francisco, is working up a bill with House leadership that would help automakers and suppliers with liquidity to avoid bankruptcy. President-elect Barack Obama's transition chief, John Podesta, told reporters Tuesday that he is in favor of helping the auto companies "remain independent."
Robert Reich, former Labor Secretary under President Bill Clinton and a member of Obama's economic transition team, said Tuesday: "The question [about bailing out the U.S. automakers] is what kind of conditions do you put on that bailout?" In an interview on MSNBC, Reich said that those conditions will likely center on job protections and commitments to green technology. A congressional staffer with knowledge of negotiations on Capitol Hill said limits on executive compensation at the automakers is "probably going to be a condition as well."
"Buy" Recommendation on Bonds
After a few days of dire Wall Street warnings about GM and forecasts of possible bankruptcy that drove GM stock down 33% from Friday to Tuesday's close, JPMorgan Chase (JPM) issued a "buy" recommendation on GM's bonds, not its stock, and spotlighted different sources of liquidity it can tap.
"We believe GM has several sources of liquidity it can access to bridge the company to 2010 when it realizes considerable cost cuts," JPMorgan Chase analysts Eric Selle and Atiba Edwards said in a report issued Tuesday. "These include an overfunded pension plan, possible asset sales, capital market transactions, equity injections, cost-cutting, and government loans," they said. Participation by the government could help free up an additional $10 billion, said one source at GM, from banks and equity holders who are sitting on the sidelines waiting for the government to act. GM executives believe they must have $10 billion to $15 billion in government loans to get through 2010 if auto industry sales in 2009 are below the 13 million forecast by some firms.
Certainly, there is a history of companies operating under Chapter 11, and emerging. United Airlines and LTV Steel—now known as Cliffs Erie are examples. But there are several reasons why GM is avoiding the option.
Bankruptcy Would Kill Sales
Chief among them is GM's belief that customers who own GM vehicles, as well as those who might consider them in the near future, would flee the companies' brands if it were in bankruptcy. In the past, when GM has been associated with the specter of a bankruptcy filing, showroom traffic drops off. During an interview with Fox Business News on Nov. 7, Wagoner said that GM's research shows that 80% of those surveyed said they wouldn't buy a car from a bankrupt car company. "If your revenue line falls, you would not be talking about a reorganization, you would be talking about a liquidation."
Some experts agree with Wagoner's assessment. Eric Dezenhall, a crisis management consultant, says the consumer doesn't always act rationally even after he has all the information. "Even though bankruptcy doesn't necessarily mean obliteration, these decisions aren't entirely rational…In the minds of many, bankruptcy equals oblivion," he said.
Still, it's tempting to find out if a coordinated communication effort between GM, Congress, and the White House could persuade consumers that GM would remain in business. Under Chapter 11, the company could renegotiate contracts with the United Auto Workers and more rapidly realign and kill superfluous brands without worry about lawsuits from its dealers. "I can envision a very efficient GM operating Chevrolet, Cadillac, and a third sales channel that sells GMC and Saturn," says independent marketing consultant Dennis Keene. "The aim of GM should be to get to the structure it would choose if it was starting with a clean sheet of paper, and that doesn't, I would think, include Saab, Pontiac, Buick, and Hummer."
Negative Stockholder Equity
GM spokesman Tony Cervone says that kind of speculation is simplistic. He notes that GM has already made huge gains in cost reductions with labor that will start paying off in 2010. "Our cost of sales will be 25%, and that is better than Toyota is today," said Cervone.
GM, in the most recent quarter, has a negative $58 million in stockholder equity on its balance sheet. That's how much the liabilities exceed its assets. That compares with negative $42 billion it reported a year ago.
The aspect of a GM bankruptcy that worries some analysts and legislators is the ripple effect that would impact Ford and Chrysler as well as numerous auto suppliers. Grant Thornton's Rodriguez says that Ford and Chrysler, in the event of a GM bankruptcy, would also be quickly driven to bankruptcy court because their costs would be so much higher than GM's, "they'd quickly find themselves uncompetitive." Too, there could be such a disruption to auto suppliers that the auto companies' production of vehicles would be interrupted as if their workers were on strike. Seventy percent of GM's suppliers also supply critical parts to Ford and Chrysler, and there is no new credit or loans for those companies outside of the government.
A Little Breathing Room
The best-case scenario, says Rodriguez, is for government loans that give GM the time and space it needs to work through the recession, the way a bankruptcy court gives relief from creditors.
"The Detroit automakers have, in essence, been pursuing an out-of-court restructuring over the past three years. These efforts have produced a competitive labor contract with the UAW, a viable solution to reduce retiree health-care expense, and a substantial downsizing of capacity and headcount," analyst Kid Penniman of independent research firm KDP Advisors wrote in a report. "Incremental gains achieved through bankruptcy would be minimal in comparison and would likely result in an even further deterioration of enterprise values as consumers would be far less likely to purchase an expensive vehicle from a bankrupt manufacturer, with or without government guarantees," he added.
By David Kiley
GM Chairman and CEO G. Richard Wagoner Jr. Getty Images
View Slide Show
Over the past several days, while General Motors (GM) Chairman and Chief Executive G. Richard Wagoner Jr. has repeated his mantra that "bankruptcy is not an option," the specter of a Chapter 11 reorganization is circling GM's downtown Detroit headquarters like vultures.
When it reported its third-quarter earnings on Nov. 7, GM said that it may face cash reserve levels (BusinessWeek.com, 11/7/08) by the New Year that would put it at the threshold needed just to meet payroll and continue some level of normal operations.
It has already suspended most of its future product programs. It has stepped up the pressure on the White House and Congress, especially the Michigan caucus, to find a way to get government help. "The third-quarter results made it clear that, without government intervention, GM is headed for bankruptcy," Gimme Credit auto analyst Shelly Lombard said.
Circuit City Isn't a Model
Bankruptcy lawyers say the automaker could benefit from a prepackaged bankruptcy, which would be a reorganization that is worked out among the automaker's creditors before the case ever gets to a bankruptcy court judge. "It would be messy but ultimately could help the company restructure itself a lot faster," says Mark Bane, a partner at New York law firm Ropes & Gray.
The biggest obstacle to any bankruptcy is the lack of availability of debtor-in-possession (DIP) financing, which is liquidity normally provided by banks and private equity firms that a company in bankruptcy needs to reorganize itself. Indeed, the question of bankruptcy has been on the minds of GM's top executives. On Nov. 6, GM North America President Troy Clarke told a gathering of auto suppliers that obtaining DIP financing would be "practically impossible" given the state of the credit markets and the size of GM's obligations. "But that's where the government could come in," says attorney Bane, "providing the liquidity GM would need to massively reorganize under Chapter 11."
The worst-case scenario for GM, say most experts, is a spontaneous Chapter 11, like the one filed by electronics retailer Circuit City (CCTYQ.PK) on Nov. 10. But a prepackaged filing could be set up to make sure that the vast majority of auto suppliers would continue to get paid on time.
Hoping for Liquidity
Others disagree. Kimberly Rodriguez, a partner at Grant Thornton, an accounting and management consulting firm that works with auto companies and suppliers, says bankruptcy is a "last resort." Rodriguez says that in better times GM and Ford (F) have provided liquidity to its biggest suppliers who would have otherwise been forced into Chapter 11, which is very messy and destructive. "The government could play that same role for GM, and it will be a lot more orderly," says Rodriguez.
Aides to House Speaker Nancy Pelosi (D-Calif.) said on Tuesday, Nov. 11, that the Speaker, whose congressional district is in San Francisco, is working up a bill with House leadership that would help automakers and suppliers with liquidity to avoid bankruptcy. President-elect Barack Obama's transition chief, John Podesta, told reporters Tuesday that he is in favor of helping the auto companies "remain independent."
Robert Reich, former Labor Secretary under President Bill Clinton and a member of Obama's economic transition team, said Tuesday: "The question [about bailing out the U.S. automakers] is what kind of conditions do you put on that bailout?" In an interview on MSNBC, Reich said that those conditions will likely center on job protections and commitments to green technology. A congressional staffer with knowledge of negotiations on Capitol Hill said limits on executive compensation at the automakers is "probably going to be a condition as well."
"Buy" Recommendation on Bonds
After a few days of dire Wall Street warnings about GM and forecasts of possible bankruptcy that drove GM stock down 33% from Friday to Tuesday's close, JPMorgan Chase (JPM) issued a "buy" recommendation on GM's bonds, not its stock, and spotlighted different sources of liquidity it can tap.
"We believe GM has several sources of liquidity it can access to bridge the company to 2010 when it realizes considerable cost cuts," JPMorgan Chase analysts Eric Selle and Atiba Edwards said in a report issued Tuesday. "These include an overfunded pension plan, possible asset sales, capital market transactions, equity injections, cost-cutting, and government loans," they said. Participation by the government could help free up an additional $10 billion, said one source at GM, from banks and equity holders who are sitting on the sidelines waiting for the government to act. GM executives believe they must have $10 billion to $15 billion in government loans to get through 2010 if auto industry sales in 2009 are below the 13 million forecast by some firms.
Certainly, there is a history of companies operating under Chapter 11, and emerging. United Airlines and LTV Steel—now known as Cliffs Erie are examples. But there are several reasons why GM is avoiding the option.
Bankruptcy Would Kill Sales
Chief among them is GM's belief that customers who own GM vehicles, as well as those who might consider them in the near future, would flee the companies' brands if it were in bankruptcy. In the past, when GM has been associated with the specter of a bankruptcy filing, showroom traffic drops off. During an interview with Fox Business News on Nov. 7, Wagoner said that GM's research shows that 80% of those surveyed said they wouldn't buy a car from a bankrupt car company. "If your revenue line falls, you would not be talking about a reorganization, you would be talking about a liquidation."
Some experts agree with Wagoner's assessment. Eric Dezenhall, a crisis management consultant, says the consumer doesn't always act rationally even after he has all the information. "Even though bankruptcy doesn't necessarily mean obliteration, these decisions aren't entirely rational…In the minds of many, bankruptcy equals oblivion," he said.
Still, it's tempting to find out if a coordinated communication effort between GM, Congress, and the White House could persuade consumers that GM would remain in business. Under Chapter 11, the company could renegotiate contracts with the United Auto Workers and more rapidly realign and kill superfluous brands without worry about lawsuits from its dealers. "I can envision a very efficient GM operating Chevrolet, Cadillac, and a third sales channel that sells GMC and Saturn," says independent marketing consultant Dennis Keene. "The aim of GM should be to get to the structure it would choose if it was starting with a clean sheet of paper, and that doesn't, I would think, include Saab, Pontiac, Buick, and Hummer."
Negative Stockholder Equity
GM spokesman Tony Cervone says that kind of speculation is simplistic. He notes that GM has already made huge gains in cost reductions with labor that will start paying off in 2010. "Our cost of sales will be 25%, and that is better than Toyota is today," said Cervone.
GM, in the most recent quarter, has a negative $58 million in stockholder equity on its balance sheet. That's how much the liabilities exceed its assets. That compares with negative $42 billion it reported a year ago.
The aspect of a GM bankruptcy that worries some analysts and legislators is the ripple effect that would impact Ford and Chrysler as well as numerous auto suppliers. Grant Thornton's Rodriguez says that Ford and Chrysler, in the event of a GM bankruptcy, would also be quickly driven to bankruptcy court because their costs would be so much higher than GM's, "they'd quickly find themselves uncompetitive." Too, there could be such a disruption to auto suppliers that the auto companies' production of vehicles would be interrupted as if their workers were on strike. Seventy percent of GM's suppliers also supply critical parts to Ford and Chrysler, and there is no new credit or loans for those companies outside of the government.
A Little Breathing Room
The best-case scenario, says Rodriguez, is for government loans that give GM the time and space it needs to work through the recession, the way a bankruptcy court gives relief from creditors.
"The Detroit automakers have, in essence, been pursuing an out-of-court restructuring over the past three years. These efforts have produced a competitive labor contract with the UAW, a viable solution to reduce retiree health-care expense, and a substantial downsizing of capacity and headcount," analyst Kid Penniman of independent research firm KDP Advisors wrote in a report. "Incremental gains achieved through bankruptcy would be minimal in comparison and would likely result in an even further deterioration of enterprise values as consumers would be far less likely to purchase an expensive vehicle from a bankrupt manufacturer, with or without government guarantees," he added.
THE ENDGAME: A SMALLER GM
Will Wagoner be around to make that choice? By approving his plan and his takeover of the troubled North American business, the GM board has signaled that it is being patient -- too patient, some analysts think. All indications are that Wagoner will be given a couple of years to get traction for his strategy. But if the cash burn rate accelerates and GM's stock deteriorates further, outside forces will pressure the board to take action, or will seize the wheel themselves. "If the board feels they're on the right path, they won't make a change that disrupts that," says CAR's Cole, who has close ties to GM's brass. "But in two to three years, if there is not an improvement on the revenue side, it's over for these guys."Private-equity investors seem to believe that the company's global cost handicap will eventually force it into bankruptcy court to shed union and dealer obligations. Wall Street bankers already are salivating over the opportunity to pick off GM's profitable mortgage operations. But the auto business is a whole other animal. For now, the legacy costs are too onerous and the politics of chopping so many jobs just too dicey for it to be worth the trouble of a takeover. Says one senior banker: "The joke used to be that all of the airlines would have to go through a car wash...now the car companies are going to have to go through the car wash. That's the challenge for anyone looking at these businesses and saying, Look, how do you deal with starting at a $2,000-a-car disadvantage vs. the rest of the world?"Just mention the word "bankruptcy" to any of GM's top executives and the mood gets frosty fast. "That's definitely not the plan," Wagoner said in a January interview. No wonder: Bankruptcy would almost certainly follow a catastrophic failure in the marketplace, or a play by a private-equity investor seeking to break up the company. In either case, management would be out on its ear.GM's cash hoard makes a court filing unlikely -- at least for now. If it happened, though, a GM bankruptcy would boggle the mind. The auto maker would bring to a judge four times the assets of the largest case filed so far, by WorldCom Inc. in 2002. Its 324,000 worldwide employees are about 70,000 more than Kmart Corp. (SHLD ) had before it filed that same year. GM could almost certainly find a judge who would allow it to dump many of its most burdensome obligations, says Lynn M. LoPucki, a law professor at UCLA. GM's pension plans are fully funded for now, but if GM's finances worsen or its pension investments sink in the coming years they might still be dumped on the federal Pension Benefit Guaranty Corp. GM also could shed its union contracts, firing anyone who didn't want to take lower wages or benefits. Ending health-care obligations to retirees alone could save $4 billion to $5 billion a year.Imagine the uproar, though, if that happened. Even if GM could demonstrate to a judge that it had negotiated for the cuts in good faith, the UAW would certainly respond with a strike. That would burn up in a few months much of the cash that any raider coveted. And pensioners could still sue for their benefits. "If there was value, you wouldn't get away scot-free," notes Wilbur L. Ross Jr., who has taken interests in bankrupt steel, textile, and coal companies.Bite the BulletBreakup or bankruptcy are the ghosts of GM's future. They become much more substantial threats if current management can't deliver on its promised turnaround over the next couple of years -- or if the board doesn't find someone who has a better idea of how to deploy GM's $468 billion in assets.It was a former General Motors chief -- the legendary Alfred P. Sloan Jr. -- who foresaw the problems that are now tying his company in knots. "Any rigidity by an automobile manufacturer, no matter how large or how well established, is severely penalized in the market," Sloan wrote in his 1965 memoir, My Years With General Motors. Of course, Sloan was talking about a competitor, Henry Ford, and his refusal in the 1920s to change his business model to build different cars to suit the changing tastes of American consumers. But Sloan's indictment stands just as well for today's GM.What would a healthy GM look like? It might have five fewer assembly plants, building around 4 million vehicles a year in North America instead of 5.1 million. That would slash U.S. market share to around 20%, but factories would hum with real demand, stoked less by rebate giveaways and cheapo rental-car sales. Workers would have a cost-competitive health-care plan but would fall back on government unemployment benefits when hard times demanded layoffs. Profitable auto sales and finance operations would fuel a richer research budget, tightly focused on four or five divisions instead of eight.This new GM might make two-thirds as many models: Chevrolet, perhaps its most recognized global brand, handling trucks and mass-market cars; Saturn, behind its cool new Euro styling, selling more expensive cars with design flair. A resurgent Cadillac would parade advanced technology and luxury. Hummer would only last as long as brawny SUVs are hip. GMC, which is very profitable these days, would stick around if Chevy couldn't satisfy America's yen for trucks. Pontiac, Buick, and Saab would follow Oldsmobile to the scrap heap.Maybe Wagoner will decide to bite the bullet and spend the billions needed to launch such a dramatic overhaul now, rather than waiting. And maybe the UAW leadership will get religion and offer more than token help. Where they decide to take GM will matter a great deal to the army of auto workers toiling away in its factories, the vast web of businesses that feed off of them, and legions of investors. As we learned a long time ago from outfits like AT&T, no company is too big to fail, or at least shrink dramatically. Not even mighty GM.
General Motors : Coming Confrontation?
Wagoner appears even less likely to start a fight to completely rewrite the union's health-care plan. The union's opposition could soften if GM's fortunes slip dramatically in the next year. But the UAW has almost never agreed to a huge giveback in the middle of a contract. (It did so in 1980, when the federal government demanded concessions as part of its Chrysler bailout, and again for Ford and GM in 1981, when spiking gas prices and a recession slammed sales.) Says Sean P. McAlinden, economist at CAR: "Why would union workers on the verge of retirement agree to cut retirement benefits?" GM's Kowaleski responds that there may be ways to get what GM wants while giving the union something in return: "Do not underestimate the breadth of scheming that can go on to come up with a win-win for everybody."There might be loopholes Wagoner could exploit. Read one way, the labor contract does not guarantee benefits to retirees -- who account for two-thirds of GM's health-care costs -- and only covers active workers, says Sanford C. Bernstein's Johnson. But one GM insider says that interpreting the contract that way would spark a "nuclear war." The UAW could find any number of ways to strike key supply factories and gum up the company. Wagoner knows that firsthand. While president of GM North America in 1998, he played hardball with the UAW over a dispute involving two union locals in Flint, Mich. Those workers, who made parts needed by every GM assembly plant, struck for 54 days over what they said were local issues. That shut down the entire company, costing it $2 billion and nine percentage points of market share, though GM recovered all but a point of that by yearend.Labor experts believe Wagoner is raising a hue and cry now to position the company for bigger concessions when contract talks open. "If you want to get the union to cut medical benefits in September, 2007, you don't start in August. You start now," says Harley Shaiken, a labor professor at the University of California at Berkeley. But if the sales picture deteriorates over the next year, GM probably will have little choice but to force a confrontation sooner and radically reshape its cost structure.
General Motors : LABOR DAY OF RECKONING
It was no coincidence that when GM executives pulled their financial guidance for the rest of this year, they pointed to the uncertainty of getting relief from the company's unions. Wagoner has to decide whether he's willing to settle for halfway measures that will only delay an inevitable confrontation when the UAW contract expires in two years, or if he's willing to risk a labor war to get big savings sooner.GM doesn't need to open the UAW contract to send workers off into retirement and close some plants. Its factory workers have an average age of 51, so many are close to the 30-year service point that qualifies for retirement. And union leaders might go along with a buyout program. The master UAW agreement says GM has to replace some of the retirees with new workers. But the union has long looked the other way as GM slashed jobs through retirement while hiring almost no new assemblers.Industry observers believe Wagoner is laying the groundwork to close a couple of factories and send thousands of workers off to early retirement. That might help, but it still only gets Wagoner about halfway to where GM needs to be. If he targets four of his 20 assembly plants, the company would be running fairly lean. David E. Cole, executive director of CAR, says GM could easily trim production by 1 million cars, or 20% of its capacity, and still have enough to serve the market. GM could save $2 billion per year in the long run by buying out 20,000 workers, estimates Sanford C. Bernstein & Co. analyst Brian A. Johnson. But it would pay $1.5 billion in severance costs to do so.That would allow GM to build fewer vehicles more efficiently, cut incentives, and pull back on low-priced sales to rental fleets. Plus, the company's remaining factories would be more productive and probably more profitable. "That would hit really bad this year," Cole says. "But it would yield returns." There are several candidates for plant closings: GM has two factories making its Chevrolet TrailBlazer, GMC Envoy, and Buick Rainier midsize SUVs; it could probably get away with one. Its next-generation minivans will likely be built at a plant in Lansing, Mich., which puts the current van plant in Doraville, Ga., on the hot seat. GM is already rumored to be considering the closure of one of its full-size pickup or SUV plants, such as one in Janesville, Wis., or Pontiac, Mich.
General Motors : On the Threshold
Now, Wagoner is pegging his turnaround largely to a rebound in large pickups and SUVs. That's highly problematic. GM should get some pop just from replacing its aging truck lineup, which is six years old and staggering as buyers turn to smaller SUVs and newer vehicles such as Toyota's Sequoia full-sized SUV and Ford Motor Co.'s (F ) rejuvenated F-150 pickup line. GM's Kowaleski says: "Even if those markets don't grow, there is a lot of opportunity for volume and profit." But first-quarter sales of full-size SUVs nosedived 21.5% from a year earlier, according to Autodata Inc., thanks to rising gas prices and competition from crossovers, such as the Honda Pilot, which carry almost as many people while using less gas. GM, with 48% of the big SUV market, is highly exposed to a downturn, according to Merrill Lynch. On the other hand, it has a paltry 19% share of the crossover SUV segment, which now accounts for nearly half of all SUVs sold.If Wagoner can't find some way to spark a sales rebound, look out below. GM's financial situation is linked so closely to how many cars it pumps out that its cash drain worsens dramatically with each lost point of market share. In a March report, Merrill Lynch estimated that with a 24% share and the current annual U.S. auto sales rate of 16.9 million vehicles, GM would bleed $2.4 billion in cash per year. If share plummeted to 20%, the cash burn would be $4.5 billion a year. Merrill analyst John A. Casesa estimates GM can last five years before it hits a liquidity crisis. "We believe that 25% market share is the threshold," Casesa says. "If GM falls below that, things get ugly fast."But that assumes overall U.S. car sales remain at their current high level. If rising interest rates, high gas prices, or other factors hammer the economy, the picture darkens further. At 15.4 million vehicles and a market share of 24%, GM would burn through $3.6 billion of cash annually, says Merrill; a 20% share would leak a catastrophic $5.7 billion. "The next blow comes if there is a recession," says longtime industry analyst Maryann N. Keller. "We just got through an [economic] expansion, and the balance sheet is in worse shape than it was before."
General Motors : Exuding Confidence
Wagoner's plan to reverse the sales slide with cool new car models makes complete sense from one perspective: The lineup needs a boost. Even with the generous rebates GM has offered from late 2001 through this winter, its U.S. market share slid 2.5 percentage points. Now that Wagoner is pulling back on incentives, the situation is deteriorating even faster. Merrill Lynch & Co. (MER ) estimates that GM's overall sales slid 8% in April as compared to a year earlier. And things will only get tougher if competitors like DaimlerChrysler (DCX ) follow through on talk of importing cheap, small cars from China. GM execs exude confidence about the new models they have queued up starting this year: the Pontiac Solstice sports car, the retro-styled HHR compact-utility vehicle, and, later, the all-new Chevrolet Tahoe and GMC Yukon large SUVs. Says GM Vice-Chairman and CFO John M. Devine: "We think we're coming on strong."But this is a company that sees the cavalry coming to its rescue with each new model year. True, GM managed to pull itself back from the brink of bankruptcy in the early '90s with a strong lineup of pickups and SUVs (and a huge lift from the economy). Recently, its revival of the Cadillac franchise, through cutting-edge design and masterful marketing, has been astounding. Even critics acknowledge that GM's new models are light years ahead of those they replace. But more often, GM's bold forecasts never pan out. Executives wrongly predicted a comeback in family sedans in the '80s, '90s, and as recently as last year. Meanwhile, they took a pass on hybrid gas-electric cars and blew a chance to get a jump on the hot crossover SUV segment with the failed Pontiac Aztek
Decisions, Decisions
Car customers like a bargain, but they aren't stupid -- they want the best car or truck, period. Too often, GM compromises on engineering so that its models can go into selected plants to keep up production volume. Example: GM's Hummer H3 SUV, which comes out later this year. Designers wanted this new, more compact Hummer to have the wide, aggressive stance that distinguished its bigger siblings, the H1 and H2. But to make the five-passenger truck cost-effective, GM trimmed its width by about six inches. That way it could use the narrow truck platform that hosts the Chevrolet Colorado and GMC Canyon small pickups. The decision saved engineering dollars and will help max out volume at the Shreveport (La.) plant, which is struggling because the two trucks have missed volume targets. But the pickup platform can't accommodate GM's vaunted I-6 truck engine, and auto enthusiasts are already grousing that the H3 may turn out to be underpowered.GM's Kowaleski responds that the H3 will have adequate power and increased fuel mileage. He adds that GM increased its capital spending to $8 billion this year and that the company's plan includes taking vehicle platforms, engines, and parts from around the world and using them to quickly and cheaply hit growth segments. He says: "Would you like to have as much as Toyota spends? Yeah. Do we? No. So we have to be smarter."But clearly, GM also needs to decide what it does well, focus its resources on that, and scrap the rest. Wagoner's plan seems to be to engineer a soft landing, paring some of the company's onerous legacy costs and, most likely, closing down some plants. But he isn't oblivious to the problems. At a meeting with mid-level managers last December, Wagoner described the strategy of engineering cars to use up production capacity as a "legacy cost," says one manager who heard the presentation. He says that when Wagoner introduced GM's corporate controller to walk through the company's challenges, he added: "After this, some of you may wonder why you still work here." And Wagoner has been moving methodically on a plan to merge Pontiac, Buick and GMC showrooms. Once the 1,500 or so dealers have all three of those brands, it should be easier for him to trim redundant models and focus the brands more sharply.But Wagoner will be hard-pressed to get enough relief on medical costs, at least before the scheduled contract negotiations in 2007. The Center for Automotive Research (CAR) in Ann Arbor, Mich., estimates that GM could save at least $1.2 billion a year just by closing the gap in co-payments and deductibles between different kinds of employees. A single, salaried worker pays at least $100 a month toward health costs, while hourly union workers pay no premiums and only a $5 co-pay on drugs. But so far, the United Auto Workers leadership has shown no sign that it's willing to reopen a contract that still has two more years to run. When GM's Group Vice-President for labor relations Gary L. Cowger suggested synching up the union and nonunion plans, UAW Vice-President Richard Shoemaker quipped: "If GM wants to give the salaried workers the same health-care plan we have, we're happy to share."In theory, Wagoner doesn't need the union's help to chop his bloated car brands. He just has to pay a lot of money. Plenty of outsiders have called for GM to kill at least one division, with struggling Buick and Pontiac the leading candidates. But look at how much money GM had to pay for its 2000 decision to eliminate the smaller Oldsmobile unit. It was obligated under dealer franchise agreements to buy back parts, cars, and some service department tooling. And to keep dealers happy, the company paid them $3,000 per vehicle sold in the last full year. The final bill for closing Olds came to about $1 billion. It left plants that made the cars underutilized, and cost GM market share.
GM'S PLAN A SOFT LANDING
Remember the old ad slogan, "This is not your father's Oldsmobile"? Well, this is no longer your father's auto industry -- but GM is still run as if it were. Fifteen years ago management struck a deal with unions that made it all but impossible to close auto plants or lay off workers without incurring massive costs. GM also agreed to cushy retiree benefits that put it at a severe disadvantage. Much of what ails GM today flows from that accounting reality and its inability to increase the business at home. The need to keep those plants running, to generate cash, and to feed a sprawling web of aging auto brands compromises car design and results in too many models that sit for years without an update. The bedrock principle upon which GM was built -- offering a car to feed every market segment -- has degraded into a series of contrived brands, most with little identity, and bland, overlapping product lines.That explains how GM's "performance" division, Pontiac, ends up as one of four units selling essentially the same family-hauling minivan. Or how Pontiac's G6 sedan was launched this year with a basic four-speed transmission and cheap plastic interior, making it a middle-of-the-pack contender against cars like the Toyota Camry, Honda Accord, or Nissan Altima. Says Gerald C. Meyers, who ran American Motors Corp. until it was bought by Renault in 1984 and who now teaches crisis management at the University of Michigan: "Instead of deciding what they want to do, they do everything and do none of it well."Compare that with how the most successful car companies -- Toyota, Nissan, and Honda (HMC ) -- do things. They concentrate research dollars on fewer vehicles, pack them with the latest features and technologies, manufacture them in low-cost, nonunion U.S. factories, and update them relentlessly. Look at the numbers: GM execs doled out $7 billion for capital spending and research and development last year, vs. $15.3 billion for Toyota. The portion of that spent in North America gets spread over GM's 89 auto models and eight divisions, compared with Toyota's 26 nameplates in three divisions. Toyota models average sales of 80,000 units a year in the U.S., whereas GM squeezes out just 52,000 sales per model on average. And Toyota models stay on the market for an average of three years before their next redesign, compared with nearly four for GM's cars.
Why GM's Plan Won't Work
...and the ugly road ahead
Slide Show >>If General Motors Corp. (GM ) were any other company, its problems would have sorted themselves out a long time ago. Logic says that when your cash holdings exceed your entire valuation in the stock market, some Wall Street shark is going to swoop in, snap up the good parts, and toss the rest. Companies with bloated factories and workforces got religion the hard way 20 years ago, in the days of "Neutron Jack" Welch. And with today's more active boards, CEOs who consistently lose ground to the competition usually don't need Donald Trump to tell them they're fired.
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But GM, of course, is no ordinary company. With sales of $193 billion, it stands as an icon of fading American industrial might. Size and symbolism dictate that its fate has sweeping implications. After all, GM's payroll pumps $8.7 billion a year into its assembly workers' pockets. Directly or indirectly, it supports nearly 900,000 jobs -- everyone from auto-parts workers to advertising writers, car salespeople, and office-supply vendors. When GM shut down for 54 days during a 1998 labor action, it knocked a full percentage point off the U.S. economic growth rate that quarter. So what's bad for General Motors is still, undeniably, bad for America.And make no mistake, GM is in a horrible bind. That $1.1 billion loss in the first quarter doesn't begin to tell the whole story. The carmaker is saddled with a $1,600-per-vehicle handicap in so-called legacy costs, mostly retiree health and pension benefits. Any day now, GM is likely to get slapped with a junk-bond rating. GM has lost a breathtaking 74% of its market value -- some $43 billion -- since spring of 2000, giving it a valuation of $15 billion. What really scares investors is that GM keeps losing ground in its core business of selling cars. Underinvestment has left it struggling to catch up in technology and design. Sales fell 5.2% on GM's home turf last quarter as Toyota Motor Corp. (TM ), Nissan Motor Co. (NSANY ), and other more nimble competitors ate GM's lunch. Last month, CEO G. Richard "Rick" Wagoner Jr. and his team gave up even guessing where they'll stand financially at the end of this year.Worst of all, GM reached a watershed in its four-decade decline in market share. After losing two percentage points of share over the past year to log in at 25.6%, GM has reached the point at which it actually consumes more cash than it brings in making cars, for the first time since the early '90s. GM, once the world's premier auto maker, is now cash-flow-negative. That's a game changer. Without growth, GM's strategy of simply trying to keep its factories humming and squeaking by until its legacy costs start to diminish is no longer tenable. If market share continues to slip, its losses will rapidly balloon.Normally a company in such straits contracts until it reaches equilibrium. But for GM, shrinkage is not much of an option. Because of its union agreements, the auto maker can't close plants or lay off workers without paying a stiff penalty, no matter how far its sales or profits fall. It must run plants at 80% capacity, minimum, whether they make money or not. Even if it halts its assembly lines, GM must pay laid-off workers and foot their extraordinarily generous health-care and pension costs. Unless GM scores major givebacks from the union, those costs are fixed, at least until the next round of contract talks in two years. The plan has been to run out the clock until actuarial tables tilt in GM's favor (a nice way of saying that older retirees eventually will die off). But with decreasing sales and a smaller slice of the market, that plan backfires -- leaving GM open to an array of highly unattractive possibilities.Hard TimesHow bad could it get? BusinessWeek's analysis is that within five years GM must become a much smaller company, with fewer brands, fewer models, and reduced legacy costs. It's undeniable that getting to that point will require a drastically different course from the one Wagoner has laid out so far. He is going to have to force a radical restructuring on his workers and the rest of the entrenched GM system, or have it forced on him by outsiders or a bankruptcy court. The only question is whether that reckoning comes in the next year, if models developed by Vice-Chairman Robert A. Lutz fall flat; in 2007, when the union contract comes up for negotiation; or perhaps in five years, when GM may have burned through its substantial cash cushion.Why is it so hard for those inside GM to see the inevitable? Take a step into the Detroit mindset. No active employee was even alive in 1930, the last time a rival sold more cars in the U.S. than GM. The idea of being No. 1 is etched into the company's DNA -- which makes it all but impossible for execs to embrace a strategy of getting smaller. And union leaders have never seen a problem that couldn't be ironed out at the bargaining table. "I think GM and the American auto industry are facing a lot of competition," says United Auto Workers President Ronald Gettelfinger. "But we've always had difficult times."Not surprisingly, GM disputes this analysis. Wagoner declined requests for an interview, but spokesman Tom Kowaleski says the company is confident it can rebuild sales momentum. "We're going to fight our way back and get more share," says Kowaleski. He also says the board is solidly behind Wagoner and that even if his plan falters, GM is prepared. "This company has a significant amount of planning in place and is looking at contingencies. Don't think that we don't have long-term plans."Increasingly, though, the solutions will slip from GM's control. At some point the laws of physics take over and, like steelmakers and airlines, GM is at the mercy of global forces. It simply cannot compete in a global economy with the enormous burden it now carries in legacy costs. It certainly cannot meet those costs for long off a shrinking sales base and negative cash flow. And distracted by those woes, it can't begin to make the investments necessary to match the Koreans on price, the Japanese on quality, and the Europeans on performance.Let's be clear: GM is not in danger of going bankrupt while it still has a cash hoard. It has a ton of liquidity -- $19.8 billion in cash, marketable securities, and money it can tap from a pre-funded retiree benefits fund. That doesn't count $8.3 billion available from bank lines and probably $5 billion GM could draw on from its profitable General Motors Acceptance Corp. (GM ) finance subsidiary. Several analysts already expect GM might have to cancel its $1.1 billion-a-year shareholder dividend; it could also raise $10 billion to $15 billion by selling GMAC's mortgage and insurance businesses.But all that cash just ensures that GM can continue its ways for a few extra years. Without a sharp course correction, GM is on a glide path to disaster. Things got downright embarrassing in April when Toyota Chairman Hiroshi Okuda raised the possibility of hiking prices to give GM breathing space, saying, "I'm concerned about the current situation GM is in." (Toyota subsequently backed off.) Wagoner has ratcheted up the urgency level in recent weeks, signaling to unions that he needs relief from GM's $5.6 billion in annual health-care costs and accelerating the delivery of new sport-utility vehicles and pickups by several months. And it now looks like he may bite the bullet and close at least a couple of auto plants to reduce GM's overcapacity. But he probably won't quickly enact a fundamental restructuring of GM's tired business model. And without that, he is relying on new car and truck models to stop the sales slide. That's a high-stakes bet that he probably can't win.If he fails to turn around sales, Wagoner probably won't be around to make the tough decisions in later years. Even GM's long-suffering board will have run out of patience by then. "It's difficult for us to see, if volumes and share continue to fall, how they're going to get the significant cost cuts necessary to stabilize cash flows," says Mark A. Oline, an analyst at the Fitch Ratings service, which has GM debt at a BBB- rating, one notch above junk, with a "negative" outlook. "Having that kind of cash drain is unsustainable over the long term."GM's remaining options involve pain for workers or investors. Here is our assessment of how the crisis might play out:
Slide Show >>If General Motors Corp. (GM ) were any other company, its problems would have sorted themselves out a long time ago. Logic says that when your cash holdings exceed your entire valuation in the stock market, some Wall Street shark is going to swoop in, snap up the good parts, and toss the rest. Companies with bloated factories and workforces got religion the hard way 20 years ago, in the days of "Neutron Jack" Welch. And with today's more active boards, CEOs who consistently lose ground to the competition usually don't need Donald Trump to tell them they're fired.
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}
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But GM, of course, is no ordinary company. With sales of $193 billion, it stands as an icon of fading American industrial might. Size and symbolism dictate that its fate has sweeping implications. After all, GM's payroll pumps $8.7 billion a year into its assembly workers' pockets. Directly or indirectly, it supports nearly 900,000 jobs -- everyone from auto-parts workers to advertising writers, car salespeople, and office-supply vendors. When GM shut down for 54 days during a 1998 labor action, it knocked a full percentage point off the U.S. economic growth rate that quarter. So what's bad for General Motors is still, undeniably, bad for America.And make no mistake, GM is in a horrible bind. That $1.1 billion loss in the first quarter doesn't begin to tell the whole story. The carmaker is saddled with a $1,600-per-vehicle handicap in so-called legacy costs, mostly retiree health and pension benefits. Any day now, GM is likely to get slapped with a junk-bond rating. GM has lost a breathtaking 74% of its market value -- some $43 billion -- since spring of 2000, giving it a valuation of $15 billion. What really scares investors is that GM keeps losing ground in its core business of selling cars. Underinvestment has left it struggling to catch up in technology and design. Sales fell 5.2% on GM's home turf last quarter as Toyota Motor Corp. (TM ), Nissan Motor Co. (NSANY ), and other more nimble competitors ate GM's lunch. Last month, CEO G. Richard "Rick" Wagoner Jr. and his team gave up even guessing where they'll stand financially at the end of this year.Worst of all, GM reached a watershed in its four-decade decline in market share. After losing two percentage points of share over the past year to log in at 25.6%, GM has reached the point at which it actually consumes more cash than it brings in making cars, for the first time since the early '90s. GM, once the world's premier auto maker, is now cash-flow-negative. That's a game changer. Without growth, GM's strategy of simply trying to keep its factories humming and squeaking by until its legacy costs start to diminish is no longer tenable. If market share continues to slip, its losses will rapidly balloon.Normally a company in such straits contracts until it reaches equilibrium. But for GM, shrinkage is not much of an option. Because of its union agreements, the auto maker can't close plants or lay off workers without paying a stiff penalty, no matter how far its sales or profits fall. It must run plants at 80% capacity, minimum, whether they make money or not. Even if it halts its assembly lines, GM must pay laid-off workers and foot their extraordinarily generous health-care and pension costs. Unless GM scores major givebacks from the union, those costs are fixed, at least until the next round of contract talks in two years. The plan has been to run out the clock until actuarial tables tilt in GM's favor (a nice way of saying that older retirees eventually will die off). But with decreasing sales and a smaller slice of the market, that plan backfires -- leaving GM open to an array of highly unattractive possibilities.Hard TimesHow bad could it get? BusinessWeek's analysis is that within five years GM must become a much smaller company, with fewer brands, fewer models, and reduced legacy costs. It's undeniable that getting to that point will require a drastically different course from the one Wagoner has laid out so far. He is going to have to force a radical restructuring on his workers and the rest of the entrenched GM system, or have it forced on him by outsiders or a bankruptcy court. The only question is whether that reckoning comes in the next year, if models developed by Vice-Chairman Robert A. Lutz fall flat; in 2007, when the union contract comes up for negotiation; or perhaps in five years, when GM may have burned through its substantial cash cushion.Why is it so hard for those inside GM to see the inevitable? Take a step into the Detroit mindset. No active employee was even alive in 1930, the last time a rival sold more cars in the U.S. than GM. The idea of being No. 1 is etched into the company's DNA -- which makes it all but impossible for execs to embrace a strategy of getting smaller. And union leaders have never seen a problem that couldn't be ironed out at the bargaining table. "I think GM and the American auto industry are facing a lot of competition," says United Auto Workers President Ronald Gettelfinger. "But we've always had difficult times."Not surprisingly, GM disputes this analysis. Wagoner declined requests for an interview, but spokesman Tom Kowaleski says the company is confident it can rebuild sales momentum. "We're going to fight our way back and get more share," says Kowaleski. He also says the board is solidly behind Wagoner and that even if his plan falters, GM is prepared. "This company has a significant amount of planning in place and is looking at contingencies. Don't think that we don't have long-term plans."Increasingly, though, the solutions will slip from GM's control. At some point the laws of physics take over and, like steelmakers and airlines, GM is at the mercy of global forces. It simply cannot compete in a global economy with the enormous burden it now carries in legacy costs. It certainly cannot meet those costs for long off a shrinking sales base and negative cash flow. And distracted by those woes, it can't begin to make the investments necessary to match the Koreans on price, the Japanese on quality, and the Europeans on performance.Let's be clear: GM is not in danger of going bankrupt while it still has a cash hoard. It has a ton of liquidity -- $19.8 billion in cash, marketable securities, and money it can tap from a pre-funded retiree benefits fund. That doesn't count $8.3 billion available from bank lines and probably $5 billion GM could draw on from its profitable General Motors Acceptance Corp. (GM ) finance subsidiary. Several analysts already expect GM might have to cancel its $1.1 billion-a-year shareholder dividend; it could also raise $10 billion to $15 billion by selling GMAC's mortgage and insurance businesses.But all that cash just ensures that GM can continue its ways for a few extra years. Without a sharp course correction, GM is on a glide path to disaster. Things got downright embarrassing in April when Toyota Chairman Hiroshi Okuda raised the possibility of hiking prices to give GM breathing space, saying, "I'm concerned about the current situation GM is in." (Toyota subsequently backed off.) Wagoner has ratcheted up the urgency level in recent weeks, signaling to unions that he needs relief from GM's $5.6 billion in annual health-care costs and accelerating the delivery of new sport-utility vehicles and pickups by several months. And it now looks like he may bite the bullet and close at least a couple of auto plants to reduce GM's overcapacity. But he probably won't quickly enact a fundamental restructuring of GM's tired business model. And without that, he is relying on new car and truck models to stop the sales slide. That's a high-stakes bet that he probably can't win.If he fails to turn around sales, Wagoner probably won't be around to make the tough decisions in later years. Even GM's long-suffering board will have run out of patience by then. "It's difficult for us to see, if volumes and share continue to fall, how they're going to get the significant cost cuts necessary to stabilize cash flows," says Mark A. Oline, an analyst at the Fitch Ratings service, which has GM debt at a BBB- rating, one notch above junk, with a "negative" outlook. "Having that kind of cash drain is unsustainable over the long term."GM's remaining options involve pain for workers or investors. Here is our assessment of how the crisis might play out:
Why GM Says Bankruptcy Is an Impossibility
WSJ colleague John Stoll files this dispatch on the troubles at the biggest U.S. car maker.
One must be careful when using the B word, as the mere mention of the word bankruptcy can be a self-fulfilling prophecy.
Associated Press
Then there is General Motors, which posted a staggering third-quarter loss and surprised the market with the rate at which it is burning cash. The auto maker today declared that its cash position, at $16.2 billion, isn’t enough to keep it going through next year without immediate government intervention. It needs $11 billion to $14 billion on hand just to pay its monthly bills.
It wants money. It needs money. And that is causing some to throw around that B word: The “third-quarter results made it clear that, without government intervention, GM is headed for bankruptcy,” Gimme Credit auto analyst Shelly Lombard said.
And yet GM executives refuse to blink, sticking to their guns when it comes to insisting that the General isn’t interested in a Chapter 11 filing to fix its problems. On Wednesday night, in a speech given to auto suppliers, GM North America President Troy Clarke said there are a few reasons the company isn’t rushing to bankruptcy court. First, obtaining debtor-in-possession financing would be practically impossible, given the state of the credit markets and the size of GM’s obligations.
Clarke then went on to say that GM has worked to solve two of the issues that many companies use Chapter 11 to fix: legacy costs and capacity utilization. Last year, GM brokered a historic deal with the United Auto Workers allowing it to eventually shed health-care obligations and potentially cut labor costs, such as wages and benefits. On the capacity side, Clarke said GM has worked extensively in the past three years to shave its manufacturing footprint in the U.S. to an appropriate size.
Of course, GM has to wait until 2010 and pay out $7 billion to take advantage of that UAW deal. And, with U.S. automobile demand collapsing further each month, GM’s capacity issues look to be far from solved. Interestingly, he avoided any mention of the concern GM often attaches to bankruptcy speculation: that people won’t buy cars from bankrupt auto makers.
GM Chief Executive Rick Wagoner wasn’t as circumspect Friday. During an interview with Fox Business News, he was asked why the company doesn’t just utilize the bankruptcy method to recapitalize itself, given that some observers suggest such a method would be much easier than the out-of-court headaches GM has been managing over the decade.
“The analysis is wrong,” Wagoner said. “What is left out in that is it assumes people will keep buying your cars, and unlike airlines–(where people) pay $300 for a ticket and use it three days from now–it’s quite a bit different than paying $25,000 and paying on getting service and support for the car you just purchased for the next five or 10 years.
“In fact, there has been some independent research that was done as recently as June of this summer which asks for every manufacturer, ‘if this manufacturer were in bankruptcy would you buy a car from them?’ Eighty percent of the people said they would immediately take that manufacturer off their list.”
Wagoner said that, in light of people’s reluctance to shop a bankrupt car company, a Chapter 11 filing may actually be impossible for GM. “If your revenue line falls, you would not be talking about a reorganization, you would be talking about a liquidation.”
In a conference call Friday, Mr. Wagoner said “this is the kind of thing we could speculate (on) endlessly.…We’re convinced the consequences of bankruptcy would be dire.”
GM’s solution? “We’re going to get creative, we’re going to get creative here,” Chief Financial Officer Ray Young said.
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Save & Share: Share on Facebook Del.icio.us One must be careful when using the B word, as the mere mention of the word bankruptcy can be a self-fulfilling prophecy. Then there is General Motors, which surprised the market with the rate at which it is burning through its cash.
It wants money. It needs money. And that is causing some to throw around that B word.
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One must be careful when using the B word, as the mere mention of the word bankruptcy can be a self-fulfilling prophecy.
Associated Press
Then there is General Motors, which posted a staggering third-quarter loss and surprised the market with the rate at which it is burning cash. The auto maker today declared that its cash position, at $16.2 billion, isn’t enough to keep it going through next year without immediate government intervention. It needs $11 billion to $14 billion on hand just to pay its monthly bills.
It wants money. It needs money. And that is causing some to throw around that B word: The “third-quarter results made it clear that, without government intervention, GM is headed for bankruptcy,” Gimme Credit auto analyst Shelly Lombard said.
And yet GM executives refuse to blink, sticking to their guns when it comes to insisting that the General isn’t interested in a Chapter 11 filing to fix its problems. On Wednesday night, in a speech given to auto suppliers, GM North America President Troy Clarke said there are a few reasons the company isn’t rushing to bankruptcy court. First, obtaining debtor-in-possession financing would be practically impossible, given the state of the credit markets and the size of GM’s obligations.
Clarke then went on to say that GM has worked to solve two of the issues that many companies use Chapter 11 to fix: legacy costs and capacity utilization. Last year, GM brokered a historic deal with the United Auto Workers allowing it to eventually shed health-care obligations and potentially cut labor costs, such as wages and benefits. On the capacity side, Clarke said GM has worked extensively in the past three years to shave its manufacturing footprint in the U.S. to an appropriate size.
Of course, GM has to wait until 2010 and pay out $7 billion to take advantage of that UAW deal. And, with U.S. automobile demand collapsing further each month, GM’s capacity issues look to be far from solved. Interestingly, he avoided any mention of the concern GM often attaches to bankruptcy speculation: that people won’t buy cars from bankrupt auto makers.
GM Chief Executive Rick Wagoner wasn’t as circumspect Friday. During an interview with Fox Business News, he was asked why the company doesn’t just utilize the bankruptcy method to recapitalize itself, given that some observers suggest such a method would be much easier than the out-of-court headaches GM has been managing over the decade.
“The analysis is wrong,” Wagoner said. “What is left out in that is it assumes people will keep buying your cars, and unlike airlines–(where people) pay $300 for a ticket and use it three days from now–it’s quite a bit different than paying $25,000 and paying on getting service and support for the car you just purchased for the next five or 10 years.
“In fact, there has been some independent research that was done as recently as June of this summer which asks for every manufacturer, ‘if this manufacturer were in bankruptcy would you buy a car from them?’ Eighty percent of the people said they would immediately take that manufacturer off their list.”
Wagoner said that, in light of people’s reluctance to shop a bankrupt car company, a Chapter 11 filing may actually be impossible for GM. “If your revenue line falls, you would not be talking about a reorganization, you would be talking about a liquidation.”
In a conference call Friday, Mr. Wagoner said “this is the kind of thing we could speculate (on) endlessly.…We’re convinced the consequences of bankruptcy would be dire.”
GM’s solution? “We’re going to get creative, we’re going to get creative here,” Chief Financial Officer Ray Young said.
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Save & Share: Share on Facebook Del.icio.us One must be careful when using the B word, as the mere mention of the word bankruptcy can be a self-fulfilling prophecy. Then there is General Motors, which surprised the market with the rate at which it is burning through its cash.
It wants money. It needs money. And that is causing some to throw around that B word.
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Tuesday, November 11, 2008
Saving GM To Avoid Lehman Fiasco; Adelson Bails Out Sands Again
GOV’T GETS A SECOND BITE AT LEHMAN WITH GM
A compelling reason to have the federal government bail out General Motors (GM) has gained increasing currency among market watchers. And it has nothing to do with saving jobs, remaining competitive in the global automotive market or protecting the interests of retirees who bet big on the auto maker’s common stock and publicly traded bonds. As the New Yorker suggested in an online posting Tuesday, the government is looking long and hard at bailing out the ailing auto maker because it regrets letting Lehman expire without a public lifeline.
The consequences of letting GM fail - by slumping into Chapter 11 bankruptcy protection or into Chapter 7 liquidation, or by simply letting the auto maker default on its credit and expire under the weight of its own obligations - certainly aren’t nearly as dramatic as the impact of Lehman’s failure. Lehman represented the largest failure in U.S. corporate history; although nobody can be sure exactly what kind of assets were at stake, at one point this year it possessed something on the order of $600 billion. General Motors probably has closer to about $100 billion in assets, according to published reports.
Many people in the financial food chain, especially financial institutions in Europe that suffered from counter-party risk when Lehman disappeared, blamed the Bush Administration for letting the investment bank collapse even though it was aggressively pursuing plans to salvage American International Group (AIG), Fannie Mae (FNM) and Freddie Mac (FRE). Like the budget-setting process, spending is often a reflection of public policy, and, in its collective wisdom, the federal government decided that allowing Lehman to collapse would have fewer adverse consequences than letting the others fail.
Estimates have projected that it would cost the government $10 billion to keep GM afloat through the end of the year, when the company is expected to have burned through its remaining cash pile. As of close September, GM had about $16 billion cash, down from $21 billion at the end of the second quarter. Buckingham Research threw out the $10 billion figure, which is a much larger capital allocation than GM has been slated to receive in the government’s $25 billion auto industry loan aimed at financing the conversion of manufacturing operations so they can churn out smaller, more fuel-efficient vehicles.
GM itself has resisted any suggestion that it would pursue bankruptcy protection, because that avenue wouldn’t address its immediate liquidity concerns, and thus creates more problems than it would solve. Chief executive Rick Wagoner recently talked about the ”unimaginable consequences” of a bankruptcy filing - though without specifying what those consequences would amount to.
Presumably, GM believes that the debtor-in-possession financing market that bankrupt companies avail themselves of would be closed to it. Credit markets overall, of course, have contracted to an enormous extent, and there’s no reason why DIP financing alternatives would be immune to those trends. On the other hand, Circuit City (CC) managed to scare up sources of DIP financing when it declared bankruptcy this week. Perhaps it’s simply a case that huge gobs of government money would come at more attractive terms and conditions than GM can raise privately. After all, the feds showed in the restructuring of the AIG bailout, which enormously reduced the obligations that AIG faced in order to compensate the government for its loans, that the Treasury can serve as a more accommodating lender than the average bank.
Still, there’s no clarity on when - or even if - the government is going to bow to GM’s commands and ride to the fiscal rescue. As a result, GM shares have fallen another 15% Tuesday, the fifth consecutive session of declines for the stock, which has traded at a 65-year low.
ADELSON SOLVES SANDS’ LIQUIDITY PROBLEMS
On one hand, Las Vegas Sands (LVS) has forestalled the kind of liquidity calamity that shareholders have worried about the last three weeks, and eased the liquidity worries that dropped the stock sharply lower. On the other hand, the company is still majority owned by a chief executive and majority shareholder who has been quarreling with his own management, and probably still hasn’t adjusted its expectations for the kind of performance it should expect out of some of the projects it’s going to continue to fund.
The good news is that Sands solved the covenant issues that it raised several weeks ago when it admitted it wasn’t certain that it would continue as a going concern if it couldn’t raise some fresh capital in a climate that’s antagonistic to raising capital. But, in fact, it succeeded in doing just that, ginning up more than $2 billion in a common and preferred equity issuance, though only after Sheldon Adelson agreed to pump another $525 million into the company he runs. That brings to a round $1 billion the funds that Adelson has contributed to his company since the end of September. While the effects of the common share issuance are going to dilute his stake in the gaming company, he’s still likely to retain a majority stake in Sands.
Is that a good thing? After posting a steeper loss for the fiscal third quarter late Monday, the company said it appointed a new executive committe that would function seperate from the board, meeting between board meetings, effectively to abritrate disputes between management, which has been quarrelling with Adelson about issues like financial structure, and the chief executive.
While the company also shelved several ambitious expansion plans, including some new developments in Cotai as well as a condo project in Vegas, Sands plans to go ahead with the $4 billion Singapore project that some analysts think won’t generate as much cash flow as the company has been counting on.
However unsightly some details of the capital raise may have proved to be, the company found itself on one of those do-it-or-collapse kinds of missions, analysts said. So the moves effectively secured - at least for now - the gaming company’s ability to continue as a going concern. But shareholders don’t have to be happy about the dilutive effect, and they’ve bid shares down some 17% Tuesday.
GM should file for bankruptcy: Hedge fund manager
NEW YORK: General Motors Corp, the biggest US automaker, should file for bankruptcy rather than taking money from the government, hedge fund manager
Bill Ackman said.
"It has been hamstrung for years because it has too much debt and it has contracts that are uneconomic," Ackman, manager of the Pershing Square Capital Management LP hedge fund in New York, said. "The way to solve that problem is not to lend more money. They should do pre-packaged bankruptcy.''
GM is petitioning the US government for aid after saying last week that it may not have enough cash to operate this year. A bankruptcy would leave bondholders in control of the company in exchange for forgiving some debts, Ackman said.
GM dropped to its lowest level in 59 years yesterday after a Deutsche Bank AG analyst downgraded the shares and said they may be worthless in a year. The slump demonstrated mounting pessimism that a turnaround will succeed at the automaker amid a global credit crisis and the worst sales market in at least 15 years.
Meanwhile, GM fell 1 dollar, or 23%, to 3.36 dollar in New York Stock Exchange composite trading yesterday, its lowest close since June 17, 1949, according to Global Financial Data in Los Angeles.
The shares have lost 86 per cent of their value this year.
"It has been hamstrung for years because it has too much debt and it has contracts that are uneconomic," Ackman, manager of the Pershing Square Capital Management LP hedge fund in New York, said. "The way to solve that problem is not to lend more money. They should do pre-packaged bankruptcy.''
GM is petitioning the US government for aid after saying last week that it may not have enough cash to operate this year. A bankruptcy would leave bondholders in control of the company in exchange for forgiving some debts, Ackman said.
GM dropped to its lowest level in 59 years yesterday after a Deutsche Bank AG analyst downgraded the shares and said they may be worthless in a year. The slump demonstrated mounting pessimism that a turnaround will succeed at the automaker amid a global credit crisis and the worst sales market in at least 15 years.
Meanwhile, GM fell 1 dollar, or 23%, to 3.36 dollar in New York Stock Exchange composite trading yesterday, its lowest close since June 17, 1949, according to Global Financial Data in Los Angeles.
The shares have lost 86 per cent of their value this year.
GM Skid Reaches 5th Day as Pelosi Backs Emergency Aid (Update1)
By Mike Ramsey
Nov. 11 (Bloomberg) -- General Motors Corp. fell for a fifth day in New York trading as House Speaker Nancy Pelosi urged Congress to pass an emergency rescue package for the ailing U.S. auto industry.
Lawmakers should take ``immediate action'' before their new session begins in January, Pelosi, a California Democrat, said today in a statement. Analysts said only federal aid can prevent a collapse for GM, and reorganizing in bankruptcy may not be possible because the credit crunch has dried up financing.
``Strategic bankruptcy is not an option for GM,'' said Mark Oline, a credit analyst with Fitch Inc. in Chicago. ``This is an issue of operating or not operating.''
The prospect of a forced liquidation raises the stakes for GM's quest for new federal borrowing after saying on Nov. 7 it may run out of operating cash as soon as year's end. GM had $16.2 billion on hand as of Sept. 30, down from $21 billion at the end of June, and needs $11 billion to pay its monthly bills.
Any automaker aid would come with conditions, Pelosi said in the statement. She called for limits on executive pay, ``independent oversight'' and ``taxpayer protections'' to ensure that companies repay any costs incurred by the government.
GM reiterated yesterday that bankruptcy is ``not an option'' even as the stock plunged to the lowest since 1946 and Deutsche Bank AG said the shares may be worthless in a year. ``A bankruptcy wouldn't address our immediate liquidity concerns,'' said Renee Rashid-Merem, a spokeswoman for Detroit-based GM.
Chief Executive Officer Rick Wagoner said GM's U.S. sales ``would be devastated'' by a bankruptcy filing. Deliveries fell 21 percent last quarter and 45 percent in October. The ``unimaginable consequence'' of a bankruptcy ``motivates us to really come up with cash in every way possible,'' Wagoner said in a Nov. 7 Bloomberg Television interview.
Investors may be concluding that GM will fail. The shares slid 44 cents, or 13 percent, to $2.92 at 4:15 p.m. in New York Stock Exchange composite trading, chopping their value almost in half in a week. It was the lowest closing price since 1943.
The U.S. bond market is closed today for the Veterans Day holiday. GM's 8.375 percent bond due in July 2033 rose 1.75 cents yesterday to 25.75 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bond yielded 32.5 percent.
GM, Ford Motor Co. and Chrysler LLC have asked for $50 billion in aid to weather the worst auto market in 17 years, people familiar with the discussions said. That would be in addition to $25 billion approved in September to help retool plants to build more fuel-efficient vehicles.
White House View
President George W. Bush would consider ``ideas on accelerating'' federal loans to the automakers, though borrowings under the $700 billion bank-rescue plan have gone ``as far as they can,'' a White House spokeswoman, Dana Perino, told reporters traveling today with Bush in New York.
She denied a New York Times report that Bush tied auto- industry assistance to a free-trade agreement with Colombia when he met yesterday with President-elect Barack Obama at the White House. ``There was no linkage,'' Perino said.
The White House signaled its opposition yesterday to a proposal by Pelosi and Senate Majority Leader Harry Reid of Nevada for Treasury Secretary Henry Paulson to tap the bank- rescue package.
Democrats' View
Should Paulson continue to resist using funds from the financial bailout, Congress would craft language to help the automakers and add it to the stimulus plan to be considered next week, Senator Carl Levin of Michigan said yesterday in an interview. Treasury spokeswoman Brookly McLaughlin referred questions to the White House.
GM is cutting jobs and shutting plants after almost $73 billion in losses since the end of 2004. U.S. sales were hammered this year by gasoline prices that peaked at $4.11 a gallon in July, damping demand for light trucks, then crimped further when the credit freeze curbed buyers' access to loans.
Wagoner, 55, told trade publication Automotive News that GM needs an aid package before Obama takes office in January. The automaker had about $43 billion in debt at the end of 2007, according to a regulatory filing.
Default Risk
Credit-default swaps protecting against a GM default for one year rose yesterday to a level that implies the market has priced in a more than 71 percent chance of default, according to CMA Datavision.
One-year credit-default swaps were quoted at a mid-price of 55.5 percentage points upfront, compared with 51 percentage points on Nov. 7, CMA data show. That means it would cost $5.55 million initially in addition to $500,000 over one year to protect $10 million of GM bonds.
Bill Ackman, manager of the Pershing Square Capital Management LP hedge fund in New York, said GM shouldn't take government money because ``it has been hamstrung for years because it has too much debt and it has contracts that are uneconomic.''
Ackman, who said he doesn't have a position in GM securities, said yesterday on the Charlie Rose show the automaker should file for a so-called prepackaged bankruptcy with financing to keep operating while in court protection.
That may be difficult. Such debtor-in-possession loans have ``all but shut down,'' CreditSights Inc. said yesterday in a report. The loans, which are paid off when companies exit bankruptcy, aren't being made as lenders become more averse to risk, wrote Chris Taggert, a New York-based analyst.
GM would have no choice but to shut down, said Maryann Keller, an independent auto analyst and consultant based in Greenwich, Connecticut. A GM failure that stops production would cost 2.5 million jobs in the U.S. in the first year, according to the Ann Arbor, Michigan-based Center for Automotive Research.
``In this world, you don't go Chapter 11 reorganization,'' Keller said in an interview. ``You go Chapter 7 liquidation.''
To contact the reporter on this story: Mike Ramsey in Southfield, Michigan, at mramsey6@bloomberg.net
Analysts: General Motors could be on bankruptcy road
After General Motors Corp. released a dismal third-quarter earnings report, analysts are saying the company probably is on the verge of bankruptcy.
General Motors (NYSE: GM) reported Friday that it lost $2.5 billion in the third quarter, or $4.45 a share. That compares with a loss of $42.5 billion, or $75.12 a share, last year.
Barclays Capital Analyst Brian Johnson said in a research note Monday that without additional financing, GM’s cash will fall to less than the $11 billion to $14 billion minimum it needs in the first quarter of 2009.
Johnson said he expects the U.S. government to offer assistance but in the process put the company in a highly levered position.
“While further government assistance would decrease the likelihood of a GM bankruptcy, we believe any government assistance would likely significantly dilute GM’s equity,” Johnson wrote.
Johnson set a target price of $1 for GM stock. The stock was in the $6 range a week ago.
GM’s stock closed on Monday at a 52-week low of $3.36, down $1, or 23 percent, on volume of 85.5 million, according to Yahoo Finance. Shares were down 52 cents or 15.5 percent, to $2.84 in Tuesday morning trading.
Deutsche Bank analyst Rod Lache on Monday set a target price of zero, saying that even if GM succeeds in averting bankruptcy, the company’s future path will likely be “bankruptcy-like.”
GM already has implemented several provisions designed to cut costs by 30 percent. GM suspended the company match for its 401(k) plan in the United States, effective Nov. 1, and suspended matching contributions for tuition assistance and other reimbursement programs, also effective Jan 1. Executives will receive no discretionary cash bonuses in 2008.
GM said Friday that it plans to lay off 3,600 workers early next year at nine plants, including its van assembly plant in Wentzville.
Circuit City Files for Bankruptcy
Circuit City Stores, the struggling electronics retailer, filed for bankruptcy protection on Monday, becoming one of the biggest, best-known corporate names to collapse amid the faltering economy.
Circuit City filed for Chapter 11 bankruptcy protection in United States Bankruptcy Court for the Eastern District of Virginia, where the Richmond, Va., company is based. The company has 712 stores and 9 outlet stores, according to a court filing.
The company has long been an also-ran in the consumer electronics sector, consistently trailing its larger rival, Best Buy. Circuit City has faced several challenges this year, including a proxy contest mounted by an activist investor and a shakeup in its management this summer.
Retailers have been especially hard hit by the slowdown in consumer spending and the clampdown in the credit markets. Circuit City announced last week that it was closing 155 stores and laying off 17 percent of its work force, or about 1,300 employees.
“Without immediate relief, the Company is concerned that it will not receive goods for Black Friday and the upcoming holiday season, which could cause irreparable harm to the Company and its stakeholders,” Bruce H. Besanko, Circuity City’s chief financial officer, wrote in a court filing. (That document is available below.)
The company said in its filing that it is seeking the court’s permission to obtain $1.1 billion in debtor-in-possession financing. Together with about $400 million remaining from a $1.3 billion credit line obtained before the bankruptcy filing, Circuit City said that it should have enough financing to make it through the holiday shopping season. (The $1.1 billion credit line will be reduced to $900 million on Dec. 29, after the holidays.)
Circuit City listed $3.4 billion in assets and $2.3 billion in debts, as well as more than 100,000 creditors like Hewlett-Packard.
The company said it aims to emerge from bankruptcy protection by the first half of 2009. It is being advised by Rothschild, FTI Consulting and the law firm Skadden, Arps, Slate, Meagher & Flom.
Below, the bankruptcy filing affidavit by Mr. Besanko:
What If GM Did Go Bankrupt...
After weeks of listening to analysts and pundits beat the drum about the possibility of a General Motors Corp. (GM ) bankruptcy, Chairman and Chief Executive G. Richard Wagoner Jr. decided he had heard enough. On Nov. 16 he declared in an internal memo to his 325,000 employees that bankruptcy is "unnecessary." There is no plan to file for Chapter 11 protection, Wagoner said flatly, calling such an action "contrary to the interests of our employees, stock- and bondholders, dealers, and our suppliers and customers."
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In other words, Wagoner was calling bankruptcy unthinkable. And for a long time, that's exactly the way it seemed. GM has $34 billion in cash and could free up roughly $15 billion more selling various businesses. That alone should be enough to keep the company running for a few years. What's more, its cash-burn rate of $2 billion a quarter will slow down as a recent restructuring, which will eliminate nine factories and 30,000 workers over three years, takes hold.But despite Wagoner's protestations, investors are clearly starting to ponder the unthinkable. The price of GM's credit-default swaps, which are insurance in case the carmaker can't pay back its loans, have soared in the past month. They now cost a premium of 12 percentage points of the value of the debt that they insure, four times what they cost in January. Few people believe that Washington would help bail out GM, as it did with Chrysler. Investors, suppliers, and employees, meanwhile, are starting to imagine how a GM bankruptcy would unfold and taking steps to defend themselves if it should happen. Some suppliers, for example, are trying to get shorter payment terms from GM in exchange for lower prices.What would a GM bankruptcy look like? It probably would be the most massive Chapter 11 filing of all time -- a watershed moment in the history of American business, with far-reaching consequences for all of GM's stakeholders. While the direct impact on the national economy would be relatively modest, the Midwest would be hit hard by the combination of job losses at GM and its suppliers and benefits cuts for the company's retirees.Plenty of observers believe that this suffering would be worthwhile, of course, if a stronger company emerged from bankruptcy. As airlines and steelmakers have done, GM could use Chapter 11 to rewrite union contracts, potentially enabling it to slash retiree benefits and close plants without having to pay furloughed workers. The auto maker could even dump tarnished brands and get bankruptcy court protection from dealer lawsuits. "Bankruptcy could do great things for GM," says William J. Rochelle III, a bankruptcy attorney with Fulbright & Jaworski LLP. But, of course, Chapter 11 is no sure bet. History is full of examples of companies that have emerged from bankruptcy simply to return in a few years. Here's a quick overview of how a GM bankruptcy might unfold for some of the key players:CustomersOne big risk of a bankruptcy filing is that it would cast such a pall over GM that sales would plummet. Consumers will buy airline tickets from a bankrupt company, but cars are a long-term commitment. Many buyers would worry (unnecessarily, in all probability) that GM wouldn't be able to honor its warranties. No U.S. carmaker has filed for bankruptcy in decades. But retailers such as KMart (SHLD ) and Hechinger and carmaker Mitsubishi all saw sales fall when their financial problems became widely publicized, notes Thomas T. Stallkamp, former Chrysler (DCX ) president and now the industrial partner for private equity firm Ripplewood Holdings LLC.To stem eroding market share, GM could eventually use the lower costs achieved through bankruptcy to drop prices and lure more buyers, says Diane C. Swonk, chief economist with Mesirow Financial Services in Chicago. But cutting prices further could just exacerbate GM's already severe revenue problems. Its per-vehicle revenue of $21,000 is $3,500 less than rival Toyota's.Rental car companies, purchasers of about 15% of GM's volume, would get nervous, too. They often sell their used models back to the auto maker. They're worried they would have to liquidate the cars themselves if GM went bankrupt, says Maryann N. Keller, a longtime GM watcher who sits on the board of Dollar Thrifty Automotive Group Inc. (DTG ). And, of course, if the company's retail sales are down, the value of used GM cars would fall, too. "GM should do everything it can to avoid bankruptcy," says Keller.SuppliersBig players like parts maker Tower Automotive Inc. and American Axle & Manufacturing (AXL ) rely on GM for a large chunk of their business. If its market share slid more quickly, they would suffer declines in revenue. The carmaker would try to keep the disruption to key business partners to a minimum, but many smaller parts makers could topple into bankruptcy, predicts Stallkamp. He says Ripplewood considered buying one thriving parts maker recently, a company with about $500 million in revenue. But it was too dependent on GM. If the auto maker stopped paying suppliers even just for a few weeks after filing, that company and a handful of others could end up in bankruptcy, he says.That's why some parts makers are starting to open talks to get paid sooner. GM has already stretched payment terms out to two months in most cases. Suppliers are also trying to diversify their sales with other auto makers, relying less on a GM that will be downsizing for the foreseeable future.Pensioners and EmployeesIf GM went belly-up, retirees, workers, and taxpayers could all take a hit. Right now, its $90 billion pension fund is fully funded on an accounting basis. But the government-backed Pension Benefit Guaranty Corp., which acts as a safety net for corporate pension plans, says GM is underfunded by $31 billion.How that would play out in a GM bankruptcy would be complicated. The PBGC could be on the hook for billions in pensions. The agency also could force the Detroit giant to keep funding its own pension plan even in bankruptcy -- though the company could make the case that it should pay less. Still, GM's 450,000 retirees would get hit: They may end up with smaller pension payouts, and their medical benefits, as well as the health-care plans of existing workers, would most likely be whittled back.InvestorsGM's creditors would also stand to suffer. The company has $31 billion in long-term debt, most of it due in 2023 and beyond. Of $34 billion in cash, $15 billion is in a fund earmarked for health-care liabilities. Who knows how much will be left in a few years? Fitch Ratings analyst Mark Oline says GM will have to spend some cash to pay for its announced restructuring and could still have to pitch in to help its former auto parts arm, Delphi Corp. (DPHIQ ).That raises the possibility that creditors won't recover their whole investment, as was the case in the bankruptcies of United Airlines (UALAQ ) and telecom firms Winstar and Teligent. By the time of a GM filing, however, many of the company's debt holders may be risk-savvy investors like Wilbur L. Ross. Turnaround whizzes like Ross buy distressed debt to get a voice in restructuring plans and then seek an equity stake when a company emerges from bankruptcy.Stockholders, however, usually get wiped out. That fact may also play a big role in keeping GM out of bankruptcy. Even if it wanted to file, billionaire Kirk Kerkorian would do everything to fight the move. His 9.9% stake is already underwater by about $350 million. Kerkorian and other large shareholders -- many of whom have suffered longer -- could band together and force management to fix the business without bankruptcy. One source familiar with Kerkorian's tactics says he wants to see a deep restructuring plan done quickly, and outside of the courts.That would be the best for all concerned, so long as the company faces up to the enormity of its current mess and executes a plan that finally stands a chance of working.
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In other words, Wagoner was calling bankruptcy unthinkable. And for a long time, that's exactly the way it seemed. GM has $34 billion in cash and could free up roughly $15 billion more selling various businesses. That alone should be enough to keep the company running for a few years. What's more, its cash-burn rate of $2 billion a quarter will slow down as a recent restructuring, which will eliminate nine factories and 30,000 workers over three years, takes hold.But despite Wagoner's protestations, investors are clearly starting to ponder the unthinkable. The price of GM's credit-default swaps, which are insurance in case the carmaker can't pay back its loans, have soared in the past month. They now cost a premium of 12 percentage points of the value of the debt that they insure, four times what they cost in January. Few people believe that Washington would help bail out GM, as it did with Chrysler. Investors, suppliers, and employees, meanwhile, are starting to imagine how a GM bankruptcy would unfold and taking steps to defend themselves if it should happen. Some suppliers, for example, are trying to get shorter payment terms from GM in exchange for lower prices.What would a GM bankruptcy look like? It probably would be the most massive Chapter 11 filing of all time -- a watershed moment in the history of American business, with far-reaching consequences for all of GM's stakeholders. While the direct impact on the national economy would be relatively modest, the Midwest would be hit hard by the combination of job losses at GM and its suppliers and benefits cuts for the company's retirees.Plenty of observers believe that this suffering would be worthwhile, of course, if a stronger company emerged from bankruptcy. As airlines and steelmakers have done, GM could use Chapter 11 to rewrite union contracts, potentially enabling it to slash retiree benefits and close plants without having to pay furloughed workers. The auto maker could even dump tarnished brands and get bankruptcy court protection from dealer lawsuits. "Bankruptcy could do great things for GM," says William J. Rochelle III, a bankruptcy attorney with Fulbright & Jaworski LLP. But, of course, Chapter 11 is no sure bet. History is full of examples of companies that have emerged from bankruptcy simply to return in a few years. Here's a quick overview of how a GM bankruptcy might unfold for some of the key players:CustomersOne big risk of a bankruptcy filing is that it would cast such a pall over GM that sales would plummet. Consumers will buy airline tickets from a bankrupt company, but cars are a long-term commitment. Many buyers would worry (unnecessarily, in all probability) that GM wouldn't be able to honor its warranties. No U.S. carmaker has filed for bankruptcy in decades. But retailers such as KMart (SHLD ) and Hechinger and carmaker Mitsubishi all saw sales fall when their financial problems became widely publicized, notes Thomas T. Stallkamp, former Chrysler (DCX ) president and now the industrial partner for private equity firm Ripplewood Holdings LLC.To stem eroding market share, GM could eventually use the lower costs achieved through bankruptcy to drop prices and lure more buyers, says Diane C. Swonk, chief economist with Mesirow Financial Services in Chicago. But cutting prices further could just exacerbate GM's already severe revenue problems. Its per-vehicle revenue of $21,000 is $3,500 less than rival Toyota's.Rental car companies, purchasers of about 15% of GM's volume, would get nervous, too. They often sell their used models back to the auto maker. They're worried they would have to liquidate the cars themselves if GM went bankrupt, says Maryann N. Keller, a longtime GM watcher who sits on the board of Dollar Thrifty Automotive Group Inc. (DTG ). And, of course, if the company's retail sales are down, the value of used GM cars would fall, too. "GM should do everything it can to avoid bankruptcy," says Keller.SuppliersBig players like parts maker Tower Automotive Inc. and American Axle & Manufacturing (AXL ) rely on GM for a large chunk of their business. If its market share slid more quickly, they would suffer declines in revenue. The carmaker would try to keep the disruption to key business partners to a minimum, but many smaller parts makers could topple into bankruptcy, predicts Stallkamp. He says Ripplewood considered buying one thriving parts maker recently, a company with about $500 million in revenue. But it was too dependent on GM. If the auto maker stopped paying suppliers even just for a few weeks after filing, that company and a handful of others could end up in bankruptcy, he says.That's why some parts makers are starting to open talks to get paid sooner. GM has already stretched payment terms out to two months in most cases. Suppliers are also trying to diversify their sales with other auto makers, relying less on a GM that will be downsizing for the foreseeable future.Pensioners and EmployeesIf GM went belly-up, retirees, workers, and taxpayers could all take a hit. Right now, its $90 billion pension fund is fully funded on an accounting basis. But the government-backed Pension Benefit Guaranty Corp., which acts as a safety net for corporate pension plans, says GM is underfunded by $31 billion.How that would play out in a GM bankruptcy would be complicated. The PBGC could be on the hook for billions in pensions. The agency also could force the Detroit giant to keep funding its own pension plan even in bankruptcy -- though the company could make the case that it should pay less. Still, GM's 450,000 retirees would get hit: They may end up with smaller pension payouts, and their medical benefits, as well as the health-care plans of existing workers, would most likely be whittled back.InvestorsGM's creditors would also stand to suffer. The company has $31 billion in long-term debt, most of it due in 2023 and beyond. Of $34 billion in cash, $15 billion is in a fund earmarked for health-care liabilities. Who knows how much will be left in a few years? Fitch Ratings analyst Mark Oline says GM will have to spend some cash to pay for its announced restructuring and could still have to pitch in to help its former auto parts arm, Delphi Corp. (DPHIQ ).That raises the possibility that creditors won't recover their whole investment, as was the case in the bankruptcies of United Airlines (UALAQ ) and telecom firms Winstar and Teligent. By the time of a GM filing, however, many of the company's debt holders may be risk-savvy investors like Wilbur L. Ross. Turnaround whizzes like Ross buy distressed debt to get a voice in restructuring plans and then seek an equity stake when a company emerges from bankruptcy.Stockholders, however, usually get wiped out. That fact may also play a big role in keeping GM out of bankruptcy. Even if it wanted to file, billionaire Kirk Kerkorian would do everything to fight the move. His 9.9% stake is already underwater by about $350 million. Kerkorian and other large shareholders -- many of whom have suffered longer -- could band together and force management to fix the business without bankruptcy. One source familiar with Kerkorian's tactics says he wants to see a deep restructuring plan done quickly, and outside of the courts.That would be the best for all concerned, so long as the company faces up to the enormity of its current mess and executes a plan that finally stands a chance of working.
Circuit City Bankruptcy ? Circuit City may shut stores to avoid bankruptcy
NEW YORK (MarketWatch) -- Struggling electronics retailer Circuit City Stores Inc. is considering a plan to shut at least 150 stores and cut thousands of jobs to avoid filing for bankruptcy protection, The Wall Street Journal reported Monday, citing unidentified people familiar with the situation.
Circuit City (CC: ![]()
, , ) has hired Skadden, Arps, Slate, Meagher & Flom LLP, which oversaw Kmart's Chapter 11 reorganization, as its bankruptcy counsel. The company also has retained FTI Consulting Inc. to develop a turnaround plan and investment bank Rothschild Inc. to guide talks with banks and secure emergency financing, the Journal reported. See related MarketWatch First Take commentary.
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"While we would appreciate [Circuit City] for its attempt to stay solvent, we remain highly pessimistic on holiday sales and on consumer spending in 2009," said Standard & Poor's analyst Michael Souers.
A filing from Circuit City would make it the largest retailer to enter bankruptcy protection in several years, the paper reported. Retailers that have filed for bankruptcy protection this year include Linens 'n Things, Mervyn's and Sharper Image.
"We're not going to speculate on rumors and comment beyond our original statement," said Circuit City spokesman Jim Babb in a response to emailed questions.
The company's management team, board of directors, and its strategic financial advisers are conducting a "comprehensive review" of all aspects of its business to determine the best methods of accelerating its turnaround and delivering substantially improved operating and financial performance, the company said in a written statement.
Shares of Circuit City fell 2.6% to 38 cents a share in afternoon trading, erasing earlier gains and wiping out 91% of their value this year.
The declining credit market has yielded the company little luck in securing debtor-in-possession financing, which helps a business in bankruptcy proceedings pay its day-to-day operating expenses, according to the Journal. By shutting the stores, 59-year-old Circuit City could liquidate about $350 million in inventory, which it could use to pay off certain real-estate costs and pressure existing landlords to renegotiate some leases, the paper added.
As of Aug. 31, Circuit City had 714 stores in the United States and 772 stores and dealer outlets in Canada, employing about 45,000 people. It had sales of $11.74 billion in the year ended Feb. 29.
In September, Circuit City withdrew its previous fiscal 2009 outlook and said that it was suspending future store openings beginning next fiscal year to review all aspects of the business ahead of the holiday season, its biggest selling period.
Faced with a slowing U.S. economy, a weakened brand position, along with stiff competition from rivals such as Best Buy Co. (BBY: ![]()
23.88, -1.33, -5.3%) and Wal-Mart Stores Inc. (WMT: ![]()
54.71, -0.47, -0.8%) , Circuit City has lost market share and customer traffic. Cash and short-term investments declined 78% to $92.5 million, while the company incurred short-term debt of $215 million.
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The retailer's liquidity position and how its financial performance may be affecting its vendors were repeated topics on management's conference call with analysts in September.
Circuit City, which began to explore a sale of the company earlier this year, said in September that all options were still on the table. It also said that it may focus internally on improving its performance to keep operating independently.
Video-rental chain Blockbuster Inc. (BBI: ![]()
1.00, -0.09, -8.3%) abandoned its bid to acquire Circuit City in July. 
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Andria Cheng is a MarketWatch reporter based in New York.
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