Editorial: The New GM

Ken Elias
by Ken Elias

GM and Chrysler both must go bankrupt. Only then, out of the ashes, can a new company emerge, taking control of the best assets of both companies, with a new management team and a clean balance sheet. All financed by private equity and bank debt, not the government, and free from the political machinations that would result. It’s pure business—of making and selling vehicles here in North America and in selected markets around the world. It’s past time for the old empire of GM to make room for a new vision of the future based on market realities.

Before we examine the future, it’s worth repeating: anyway you slice and dice General Motors (and its sister sibling Chrysler), there’s not a chance to resuscitate the company in its present form. Trying to do this out of bankruptcy makes no sense at all, even with various parties making accommodations of trading debt for equity, wage/benefit cuts, or simply making “shared sacrifices.” In the end, the balance sheet still has too much debt, brands and dealers. Not mention the fact that the existing management team (and BoD) has proven itself incompetent after years of failing to address its structural problems in a meaningful way.

Extricating Chrysler and GM from this mess will require the “mother of all private equity” equity deals, the biggest one yet, and likely one of the most profitable when the company goes public. And that’s the New General Motors Corporation in 2012. Here’s how it works.

From the bankruptcy, the judge allows the sale (via Section 363 of the Bankruptcy Code) of assets to raise proceeds for the debtor. The beauty of the asset sale comes from the ability to cherry pick the best assets. GM has a lot of assets that are worth lots of money once they’re free of the associated liabilities. So a new buyer gets to assemble a new GM out of the ashes of the old.

The way I see it, a new company would acquire Chevrolet and Cadillac (and some models from its other brands), associated assembly plants, its huge trove of patents and marques, and some of its foreign operations (like Canada, Mexico, Latin America and Eastern Europe). In North America, the new company would not acquire any franchise agreements; instead it would sign “operating agreements” with dealers for the interim as it figures out the right-sizing of its ultimate distribution network. And best of all, it would have a new management team properly motivated to make decisions that maximize value and profits unburdened by any legacies.

The New GM would not take the union contracts with it. Those were signed with the old companies. Many hourly workers would have the choice to gain employment with the New GM, at parity labor wages and benefits with the transplants. Work rules would also be re-written to mirror those of Honda and Toyota, not echoing Detroit’s featherbedding past. Better to have a good paying job than no job at all.

As for the old GM and Chrysler, the debtors wind down through a process of selling the remaining assets to others and dividing up the proceeds among creditors as directed by the Court. For example, the Chinese JVs should be sold back to their partners (SAIC and Wuling) for cash and the rights to use certain marques within certain geographies (like Buick only in China). The remainder of the foreign assets, like Opel, Vauxhall, and Holden, can be sold to others (like foreign governments?) or simply shut down.

As for suppliers, many will fail. But those critical for the support of the new GM will have their pre-petition claims accelerated and paid. The Court can determine that this will be necessary to enhance and preserve the value of the assets being sold to the New GM; without key suppliers, there would be nothing to sell (i.e., if the new company can’t get parts).

For private equity investors and their lenders, the new GM would be acquired at the bottom, not the top, of the auto market. My guess is that these assets are worth at least $20 billion. That’s cash that goes to satisfy the liabilities of the old GM. Operating cash for the New GM would be provided by commercial lenders and debt offerings—all untainted by the old GM.

So imagine a New GM free from its past and run by private equity investors, not the government. Two strong brands—Chevrolet and Cadillac and a minor brand of Jeep—with the best vehicles and dealers from the old GM. Perhaps it would have a US market share of 15 percent, making it smaller than Toyota but similar to Ford. And when the car market comes back (and it will), the New GM can be a successful and vibrant company. That’s what’s called a real investment.

Ken Elias
Ken Elias

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  • T2 T2 on Mar 03, 2009

    Forget saving jobs inside the domestic auto sector that are under the control of two dysfunctional managements. I would rather express hope that the Obama administration is eyeing those foreign manufactured platforms that sell more than 30k units here. North America should not be reducing foreign unemployment lines at the expense of its own. Those imported vehicles should be built here. I'm thinking specifically of the Toyota Prius since Toyota is on record to bring 100k of them here for 2010. Regarding the domestic industry, longtime mismanagement of production capacity has led to an overcapacity that needs to be adressed with some serious trimming that can't avoid anything other than be detrimental to the labor force. More than that Product Planning has also been mismanaged. Although more than ten years have elapsed, GM and Chrysler have yet to come up with a Prius fighter. Regretfully GM and Chysler need to be let fall as happens in other industries when managers take their eyes off the ball. For instance, anyone remember Digital Equipment Corporation ? Well, during the late seventies DEC gained significant market share in the computer business by the manufacture of lower cost minicomputers. This was facilitated in some ways by the larger companies such as IBM who were ignoring the market for smaller machines. Sound familiar ? Ten years later DEC was making the same mistake and ignoring the microcomputer market even though their CEO had demonstrated an early prototype back in April '76. Bear in mind that DEC had significant revenue inflow from a huge customer field service division that supported their floor standing machines. With this mindset they were careful to avoid doing anything that would potentially cannabalise their own market and therefore downplayed their emphasis on the microcomputer business. There's a close similarity in this to GM's own attitude to the EV1 here. Despite DEC's reticence, Steve Jobs proceeded with Apple into that business category. Then IBM, determined not to be burned a second time, changed their strategy. There was no time to design their own microprocessor architecture so they abandonned their NIMBY design culture and followed on with an outsourced processor chipset from Intel. That's right, computer giant IBM couldn't come up with their own competitive chips in the immediate time frame !! However IBM knew what was important and that was to be a player in this new game as we all know. Compare the IBM situation to that of GM in the auto sector regarding the introduction of full hybrids. The outcome is much different. When GM arrives late to the party, this time there is no equivalent "Intel" around to offer the enabling technology. The upshot of this error by DEC management, failing to commit to the right product, resulted in the loss of jobs for tens of thousands of career computer techs who were let go as PC desktops and servers replaced minicomputer systems. But NO bail out for them. Why should a similar error by GM and Chrysler not result in the same fate as befell DEC ? As DEC was failing it was taken over by Compaq. Compaq overvalued DECs worth and was unable to profitably consumate the union resulting in yet another trade. This time Compaq was itself taken over by Hewlett Packard and DEC disappeared from the radar. For GM to survive it must come from within. I see the best result coming with a new GM to emerge through an unassisted C11 restructuring with a newly elected BOD, if that's at all possible. Obama is introducing the politics of change then he has to demonstrate that the BODs and their CEO's who have shown poor vision will go to the wall. Unlike GM, Ford management, in the hiring of Mr Mulally, show that they at least, recognize the value of some new blood in order to affect changes in strategy. For both that reason and to preserve at least one American design house in north America, Ford should be assisted in my opinion with govt loans. You could say that Ford's woes have been precipitated by the flooding of the market by the two other domestics as they drove their businesses into the ground. Finally we need smaller companies for a stable society. Being "too big to fail" must be prevented to avoid the type of societal upheaval that results when corporate governance goes astray. T2

  • Tonycd Tonycd on Mar 04, 2009
    I also do not believe that private equity is the white knight that is described in the article. Our only example to date of a very gifted private equity company running a car company is Cerberus/Chrysler. I see nothing to believe that a similar outcome would not occur with GM. The only workable solution is a government financed debtor-in-possession C-11. Ideally, the result of which would be a new CEO and BOD. A good CEO (example Ford) paired with a clean balance sheet would put GM back on the road to good health. I agree with Mr. Sparky's comments above. I'd further point out that the only reason the transplants' auto workers make the good salaries they do is because of the pressure applied by the existence of the UAW. Toyota has already made noises about slashing the pay of their U.S. workers, even before the recent catastrophe. Does anyone really believe they wouldn't just do it straightaway if not for this? We need to remember what's most important about this outcome. This is not a theoretical MBA-class exercise. The best outcome is the one that's best for the American public. That means maintaining as many good jobs as possible. When we as a public buy Wagoner's and the corporate plutocracy's propaganda that the unions created all of GM's troubles, we make the restoration of American carmaking pointless. Henry Ford (not a terribly unsuccessful businessman) had the right idea -- the workers should be paid well enough to afford the company's products. There can be no economy without customers.
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