The GM Story Continues

We appear to be reaching the end of the GM saga. The end that is of this interminable run up towards the company’s reorganization. This morning’s announcement by GM’s management contained some fairly aggressive measures. It also signaled that the company had finally heard the administration’s message about both urgency and extent with respect to the cuts necessary to assure ongoing government support.

Recall that the criticism leveled at GM previously was that its survival plan seemed to lack the kind of drastic surgery most experts thought would be needed for the company to sustain itself free of government aid, and was very far from the action needed to assure a return to vibrant profitability. Hence the turning of the screws back then and the ouster of the old CEO. Apparently the message got through.

Today’s presentation includes some hard ball gamesmanship. The Company is asking its major creditors to swap their debt holdings for equity. The exchange rate GM wants to do the swap at imposes a severe ‘hair cut’ on the bondholders: they will receive 225 shares worth $414 for every $1,000 of debt they own. The implied share price in the swap includes a hefty premium over today’s opening stock price. Whether the creditors accept the deal remains to be seen, but to focus their attention the company has been making very obvious and dark threats about bankruptcy. It is highly likely that the creditors would receive less in bankruptcy court than the GM proposal gives them, so, at least on the surface, the deal being offered must be tempting. Ultimately the bondholders will have to decide whether the new GM is survivable and therefore offers a better way to recoup their losses than a fight in bankruptcy court. Given the parlous state of the company, the declining value of its assets – just how many buyers are there for auto production lines? and its escalating pile of debt, I would say bankruptcy looks much the worse of two terrible options.

The rest of the plan is grim.

GM is now saying it will definitely ditch the Pontiac brand; it will cease making Saab cars; it will get rid of the Hummer brand; it will reduce its workforce by about 21,000 jobs; it will slash its distribution system by cutting out 42% of its independently owned dealerships [cutting out 2,641 from its current 6,246]; and it will offer both the UAW and the government equity in order to convert the debts of each of them into equity.

At the end of the day the new plan produces a very lean and profitable GM that is approximately 85% owned by the government and the union. The bondholders would own about 10%, and the current equity holders less than 5%.

While all this sounds draconian, the outcome of a bankruptcy filing would probably have been more severe: most likely the company would have re-emerged in two pieces, Chevrolet and Cadillac with all the rest of the brands being liquidated.

As you know I have been arguing for a GM bankruptcy or re-organization from the outset of this crisis. So today’s plan is welcomed here as being a bold and sensible step in the right direction.

Coupled with today’s other news that Fiat and Chrysler had reached agreement with the UAW on the terms of a deal, and it looks as if the American auto industry is turning a corner at last.

There’s a long way to go of course, but we’re finally moving in the right direction.

Having said that I feel awful for those 21,000 people, their families, and the communities in which they live. If only these companies had been well managed years ago, much, if not all, of this trauma could have been avoided.