Monday, June 01, 2009

It's Official: GM Declares Bankruptcy; Chrysler Sold to Fiat

So, where does the company go from here?
General Motors Corp., the world’s largest carmaker until its 77-year reign ended last year, filed for bankruptcy protection in the U.S. with a plan to create a 21st-century company that can compete in world markets.

GM reported $82.29 billion in assets and $172.81 billion in debt. The U.S. government will bankroll the transformation of the 100-year-old automaker, a victim of tumbling sales and higher gas prices. The U.S. plans to convert much of its $50 billion of loans to a 60 percent stake in the new entity, administration officials said. Today’s filing coincides with a deadline for GM to convince a government auto task force that it could reorganize out of court through debt and cost cutting.

“It’s been a long time coming, but the reality of a GM bankruptcy is still a bitter pill to swallow -- it’s a bit like the Titanic sinking,” said Stephen Pope, chief global strategist at Cantor Fitzgerald in London. “This is a step they should have taken more than a year ago, which could have put them in much better shape before the economy went down.”

Detroit-based GM is the largest manufacturer to file for bankruptcy, surpassing Chrysler LLC. The carmaker plans to launch a new company in 60 to 90 days, armed with vehicles from its Cadillac, Chevrolet, Buick and GMC units for the U.S. market. A federal bankruptcy judge would supervise the sale or liquidation of unprofitable brands, such as Saturn and Hummer, and at least 11 unwanted factories.
We own the company - by we, I mean the federal government, which continues pouring billions into the company while the company reorganizes, but will not get the money back. Instead, the government is buying a significant stake in the company.

I don't have anything good to say about this particular arrangement. The government continues to do an awful job of predicting winners and losers, and to suggest that the government can figure out what vehicles the public wants is going to be entertaining to watch. Of course, the government could simply dictate that the public has to buy those fuel miser vehicles, but that's going to lead to significant backlash. They'll have a quick opportunity when they decide the fate of the Chevy Volt, which is one of those expensive loss-leaders that GM was going to rely upon to help improve its CAFE figures, but which wouldn't help improve its solvency issues. The government will have to figure out which is more important - getting the company on solid fiscal footing or pushing it's eco-agenda. Shareholders responsibility is to get the company on solid fiscal footing, so if the company holds onto the Volt, they'll have to run serious contortions on why this makes fiscal sense (then again, it's the government, which means fiscal responsibility is out the window).

Thousands of dealerships will be let go, and that means that tens of thousands more people will be laid off. It was long overdue, but it doesn't make the situation any better. Factories will be shuttered and the nation's industrial base will shrink further. Again, these changes are necessary, but that doesn't reduce the pain that will be felt throughout the industrial centers around the nation. It also means that tens of thousands more jobs are at risk as suppliers find product lines coming to an end.

Magna is buying General Motor's European division, Opel, and it's expected that the brand will focus on electrification. Unless you have a power generation and distribution system that can handle increased loads, and charging stations for those vehicles, the electric vehicles will continue to suffer from image problems.
GM will also apparently retool a factory that is currently idle so as to produce new smaller more efficient cars. It remains to be seen if anyone will actually go ahead and buy them.

Separate from all this is the fact that the government is shredding traditional bankruptcy policy by putting junior creditors ahead of senior creditors. Bondholders are getting shafted, which has long term credit implications since they'll be less likely to invest in other entities when they know that the government will simply shove them aside in favor of the unions. The unions make out like bandits under this proposal, getting 17.5% of the company, while the bondholders and other unsecured creditors get 10% (their actual share was much higher, and they will get warrants to buy another 15%).

Meanwhile, the Chrysler sale has been cleared to Fiat. CNBC also reports that the unions finally made concessions to help bring the costs in line with that of Japanese automakers operating in the US. That's going to save the new GM more than $1.3 billion annually.
In the U.S., the United Auto Workers' ratification of concessions, announced Friday, will save GM $1.3 billion per year and bring its labor costs close to those of its Japanese competitors. The new UAW deal freezes wages, ends bonuses and eliminates some noncompetitive work rules.

It also moves billions in retiree health care costs off GM's books. In exchange for its ownership stake, $6.5 billion of interest-bearing preferred shares, and a $2.5 billion note, the trust will take on responsibility for all health care costs for retirees starting next year. Higher health care costs alone accounted for a $1,500-per-car cost gap between GM and Japanese vehicles.

GM will offer buyouts and early retirement packages to all of its 61,000 hourly workers as it plans to shrink overall employment. The company also has about 27,000 white collar employees. In contrast, GM employed 618,000 Americans in 1979, more than any other company.

If this new company can't get its act together, those concessions wont mean a whole lot, nor will the ownership of the company.

UPDATE (Legalbgl):
In related news, the Dow Jones Industrial Average has replaced GM with Cisco.
The Dow Jones industrial average is adding Travelers and Cisco Systems, dropping Citigroup and General Motors.

The announcement Monday of the changes to the 30 stocks that make up the best-known barometer of Wall Street comes as GM enters bankruptcy protection, a move that was widely expected.

Dow Jones said in a statement that Travelers, the property and casualty insurer and one-time division of Citigroup, would replace its former parent. Cisco , which makes computer networking gear, is filling the role left by GM after 83 years as part of the Dow.

The changes take effect June 8.

GM and Citigroup's place on the DJIA has been tenuous at best as of late. The DJIA has strict rules regarding keeping your stock price over $1.00, and both of these companies have dipped below that level recently (although Citigroup has rebounded to over $3.85 as of late.)

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