General Motors is facing increasingly strident demands from major shareholders to restructure the business after its share price fell to a 23-year low last year, destroying half the company’s value. But there is disagreement in the managerial ranks as well as among outside observers on how far restructuring should go and on prospects for the company. David Robertson reports.
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GM is beginning to resemble the auto-making equivalent of a head-on crash with one of its own Hummers: the company lost $8.6bn globally in 2005 – $5bn in North America. Its debt rating has disappeared so far into junk status that it was last seen on eBay; market capitalisation fell to just one-fifteenth of Toyota’s; and US market share has retreated to a level not achieved since horses were a viable transport option.
Sales in the profit-sustaining SUV sector were 150,000 lower last year than in 2004 and other divisions had to be supported with incentives that averaged $5,700 a vehicle, according to analysts CNW.
Chief executive Rick Wagoner has outlined a number of measures to return the company to profitability, including closing a dozen plants and axing 30,000 jobs by 2008. GM also reached an agreement over retiree healthcare costs with the United Autoworkers (UAW) union that should cut billions from the balance sheet. In addition, the company continues to negotiate a partial sale of the General Motors Acceptance Corporation (GMAC), which could net up to $11bn.
But analysts are concerned that these measures don’t go far enough. They believe GM is taking small steps towards restructuring when giant leaps are needed. Many on Wall Street want radical action, and when Wall Street starts talking “radical” they mean “go out and start a revolution”, not “go out and buy a Che Guevara T-shirt”.
The most contentious area of disagreement between Wall Street and GM is the possibility that the Detroit giant could move into Chapter 11 bankruptcy protection. Some analysts feel it is the only way GM will ever be able to cut sufficient costs to restructure properly.
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By GlobalDataLast November, Banc of America Securities analyst Ronald Tadross raised his estimate of a bankruptcy happening within the next two years from 30 per cent to 40 per cent – prompting GM to call Tadross’s prediction “inflammatory and speculative”.
But after assessing GM’s books, Standard & Poor’s dropped a bombshell when it said the automaker might have to look at Chapter 11 as the only way to slash labour, healthcare and pension costs.
Rick Wagoner is vigorously resisting calls to put GM into Chapter 11 protection claming that consumers would be extremely wary of buying a $30,000 automobile from a company whose warranties and servicing agreements weren’t worth the paper they were written on.
This argument appears to be winning over many investors. Bear Sterns analysts Peter Nesvold and Mike Geoghegan said: “Business, arguably, would not go on as usual for a bankrupt GM… We tend to agree that there are generally too many other vehicle options on the market for the consumer to take that risk [of buying from a bankrupt GM].”
So, if Chapter 11 is off the table for now what else can GM do to knock the dents out of its panelling?
Tracinda Corp, the investment vehicle of Las Vegas-based billionaire Kirk Kerkorian, has bought 9.9 per cent of GM and Kerkorian’s adviser, Jerry York, recently elected to the GM board, has been outlining some of the ways GM could restructure.
According to York, GM is losing $25m a day. The company has approximately $25bn in liquidity (including $19bn in cash), which gives it about 1,000 days of survival time. That isn’t long to turnaround a company as weighty as GM and York believes some painful concessions will be needed from management, employees and shareholders.
York wanted and got a 50 per cent reduction in the dividend; he also wants product lines like Saab, Hummer and Isuzu to be sold off; he wants pay cuts across the company and he wants more capacity reduction – i.e. more job cuts. A number of Wall Street’s heaviest hitters are lining up behind York’s proven experience to back his proposals.
Citigroup analyst Jon Rogers wrote after hearing York’s ideas: “As a veteran of Chrysler Corporation’s dramatic turnaround in the early 1980s Jerry York’s suggestions for GM today carry a credibility and insight few others can deliver… Tracinda’s restructuring plan is largely in line with our thesis on fixing General Motors.”
Bear Sterns added: “York took many of these actions during turnarounds at Chrysler and IBM. We believe he has the credibility to deliver the plan.”
However, GM has shown little interest in York’s ideas. At the Detroit Motor Show early this year executives made it clear that they weren’t considering them too carefully – although that might change now that Jerry York is on the GM board.
Others in the industry have their own views on how GM could restructure. The Wall Street Journal recently noted that GM could save $800m by ending a scheme that pays workers not to work. GM also offers employees college tuition reimbursement of $6,400 a year. These are worker welfare programs that seem positively French in their generosity and, given GM’s financial position, there is a strong logic for getting rid of them.
But messing with worker rights will have to wait until 2007 when GM’s contact with the UAW is renegotiated. As labour costs are weighing the company down a confrontation between GM and the UAW could be one of the highlights, from a spectator’s point of view, of 2007.
Bear Sterns’ analysts Nesvold and Geoghegan wrote: “A new master agreement will be negotiated with the UAW during 2007. Here again our sense is that the UAW negotiation is key, not just for 2007 results, but for the long haul. However, GM noted in its presentation that it views the 2007 UAW negotiation as both an opportunity and a risk, which indicates to us that the company expects a serious showdown.”
This could be the radical moment Wall Street has been looking for. GM’s management has so far pulled back from confrontation with the unions (they’ve been circling the wagoners perhaps?) but many on Wall Street believe renegotiating the labour contract is vital to the company’s future.
If GM executives fail to extract some unprecedented concessions from their workers the calls to go into Chapter 11 will likely get stronger.
Finally, it should be noted that not everyone on Wall Street shares Citigroup’s pessimism (“meaningful recovery still appears years away”). KeyBanc Capital Markets increased its investment rating for GM in January because “we believe that investor sentiment will improve as GM’s market share, earnings and cash flow will all benefit from the launch of the GMT-900 full-size SUVs and pickup trucks over the next two years and cost savings begin to materialize from the company’s large-scale restructuring efforts.”
KeyBanc believes the drop in big vehicle sales has been overplayed. Pickups, the firm notes, actually saw a 2 per cent increase in sales last year and the new SUV range, to be launched later this year, certainly created a good buzz at the Detroit Motor Show.
KeyBanc’s analysts Brett Hoselton and Steve Barger added: “We believe as GM introduces its new full-size SUV and pickup trucks, which represent roughly 25-30 per cent of GM’s overall sales, market share gains within these segments will go a long way towards mitigating or possibly offsetting any declines in other segments.”
Strong sales from the new SUV range will significantly bolster GM’s position this year. But a surge in SUV sales will depend on a number of factors: petrol prices can’t return to $3 a gallon levels, political cartoonists have to avoid troublesome subjects and consumers have to rediscover their big is beautiful attitude towards autos. Given the current world situation this might be a lot to ask.
David Robertson
