You just imagine Rick Wagoner, General Motors’ CEO, telling the new boy: “Go on son; this is your big chance.”
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Fritz Henderson, appointed only this month as the chief financial officer for GM, beams with pleasure at the thought of being the one to come up front and announce the 2005 GM financial results to the world’s press and the keenest minds in equity analysis
He picks up the presentation papers and scans them.
“But Rick.”
“Yes Fritz?”
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By GlobalData“We lost eight point six billion dollars.”
“You’re right, son.”
“And you want me to announce our biggest corporate loss since 1992?”
“That’s it.”
“Why me?”
“Well someone’s got to. I’m just sitting back here and answering questions.”
Fritz steels himself and frantically mugs up on the way that the results are usually presented. “I’m ready Rick.”
“Get started then son.”
“Slide 2 everybody. The results for the fourth quarter were a loss of $4,777 million dollars.” Pause. Phew. “The losses are very large.”
“Next. The Calendar Year, and other highlights.” Thinks: it says highlights at the top of the slide but surely someone should have changed the template…
“Uuuumm, there are no highlights. Including special items we lost $8.6bn.”
There are not too many easy ways of telling the world that your organisation has given away a million dollars an hour, night and days seven days a week for the last year. Usually, that sort of thing is left to the national lottery.
Is GM in the cart? The share price says so. It went down again after announcement. The bond prices say so. If you want to buy a GM dollar bond yielding over 8% for the next 27 years you can do so for 72 cents.
There are really three big “ifs” on the survival plan:
- If the unions let them change the contracts that don’t expire until 2007;
- If the new product sells better than the old and;
- If GMAC can somehow continue to get cheap finance despite GM, the parent, losing its investment rating, then GM can get away with it for a while longer.
To expand the last point first:
GMAC borrows money cheaply from the institutions and lends it to Joe Public to buy cars and houses. If it stops getting cheap money it loses its competitive position and revenues flow away. Because GMAC is buried within GM, and GM now has the investment rating of junk bonds, the investing institutions cannot lend money to GMAC.
The short-term solution to that is to sell GMAC so that it can sit somewhere where it can receive the cheap money. The only problem with that is that within the GM group, GMAC makes all the money and GM hoses it all away.
Last year, according to the fresh figures, GMAC remitted $2.8bn in dividends to the parent which was only $66m less than the previous year so there is no huge erosion yet.
But in this time of ever-rising liability and ever-rising operating losses, cash is the one big measure that GM points to in order to convince the market of its durability. It has $20.5bn of cash remaining. The loss of the GMAC dividend becomes a material issue.
The UAW controls how much money is paid to the people GM have to keep in the so-called “jobs-bank” who are paid to be available for work but are not required. The union is also resisting reductions in the employer’s contributions to health care for both active and retired employees and, of course, the rate at which new hires are paid.
In addition there is now a pending $3.6bn liability for the people who nominally remained GM employees and were “loaned” to Delphi when that captive components supplier was (partially) sold to obliging equity investors. It is now bankrupt and GM has to stump up the compensation.
But in the end, it is always only product that saves a distressed auto company. This one has a decent new product pipe-line by all accounts. The problem arises if the consumer maintains his flight to medium saloons rather than riding high in his minivan or SUV which is increasingly painful to top up at the petrol pump.
Then GM will have to drop all mention of highlights and build a new set of Powerpoint templates.
Rob Golding
