General Motors Death Watch 25: GMAC RIP
It may not have escaped GM watchers' notice that The General has just announced that it's selling 60% of the General Motors Acceptance Corporation's (GMAC) commercial mortgage division. This after agreeing to sell $55b worth of GMAC car loans to Bank of America. The bottom line is clear: The General is hawking the family silver. The only solidly profitable part of the entire corporation is being sold off piecemeal to increase GM's liquidity. It's the long-predicted beginning of the end.
Before we explore GM's rationale for the sale, it's critical to note the commercial division's new owners: Kohlberg Kravis Roberts & Co (KKR). This hugely profitable investment firm practically invented the leveraged buyout. KKR's MO: raise money through junk bonds (ironically enough), buy a large company, sell off underperforming assets, restructure the core business, cut costs and, eventually, re-sell the new, leaner company at a huge profit. KKR has sliced and diced Texaco, Gillette, Playtex, Beatrice, Safeway, Borden, Samsonite and Toys 'R' Us.
More importantly, in 1988, KKR engineered the largest leveraged buyout of all time. They bought RJR Nabisco for $25b. Are you thinking what I'm thinking? KKR's purchase of GMAC Commercial could be the curtain-raiser for buying GM. Obviously, T-TAC is not the only organization which understands that GM's eight divisions would be more profitable if they were independent entities. By the same token, aggressive brand consolidation would also offer greater earnings potential than GM's current corporate cluster fuck. KKR is exceeding good at implementing both strategies.
Of course, the largest obstacle to aggressive restructuring of The General's fiefdom is, without question, the United Auto Workers. No matter who owns GM, the UAW isn't going to play ball until its contract expires in 2007. Even then, they'll fight any pay or health care reduction, restructuring of working practices or elimination of job protections. There's only one way to shuck the union straight jacket: Chapter 11.
Under Chapter 11, GM could seek "protection" against all its union obligations. The company's management could restructure the corporation to the court's content. Given that GM is haemorrhaging $4b per year, the unlikely popularity of GM's latest truck-heavy model line-up, the imminent demise of the sales-sucking Employee Discount for All Program, and the looming prospect of GM assuming $9b of Delphi's pension and retiree health care obligations, the bleeding may worsen. It's a race between management's attempts to stave off bankruptcy and a rushing tide of red ink.
By selling GMAC, GM is literally buying time. No doubt the current management has a new, improved rescue plan that requires an additional five years or so for full implementation. No doubt Rabid Rick Wagoner really does mean to confront the union over health care benefits… eventually. But the torpedo boats are circling. Lest we forget, Kirk 'Tree Shaker' Kerkorian owns a big slice of the action. While we've heard nothing from Mr. K's Tracinda Corporation, it's entirely clear who's management style jibes with his, and you won't find them at GM's Renaissance Center. At least not yet.
There's only one way GM's current management can hang onto their jobs/save the company/avoid a leveraged buyout: trigger a UAW strike and tough it out until they can hammer out a new deal. All Rick would have to do is cut the UAW's health care benefits unilaterally. Of course, surviving a company-wide strike would require a HUGE war chest– which GM is currently acquiring by divesting itself of GMAC.
Could GMAC's forthcoming dissection be part of Rabid Rick's secret end game? That theory pre-supposes that Mr. G Rick Wagoner Jr. is willing to subvert– indeed annihilate– the corporate culture which hired him straight out of Harvard Business School, and put tens of millions of dollars in his pocket. So, no; Rabid Rick and his minions aren't cunning or brave enough to use the nuclear option. They really do think they can produce a turnaround within the current structure– which is a more and more ridiculous idea with each passing day.
The real question here is the same one posited by Wall Street's Mr. Gekko. Is greed good? Is America better served by the elimination of the jobs-for-life, one-big-family ethos that is, was and can no longer be General Motors? Is it better for America's largest automaker to serve shareholders' and consumers' interests than the workers'? Hell yes. Post Chapter 11, GM will arise Phoenix-like from the ashes as a leaner, meaner, keener company. And if it doesn't, it will make room for those companies that are. Such is the way of evolution, which will not– CAN not– be denied.
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