Bailout Watch 540: NYT Loses Faith in New GM

Robert Farago
by Robert Farago

The New York Times:

For taxpayers to be made whole, the new mini-G.M. would have to produce earnings sufficient to support an enterprise value of at least $95 billion, the sum of a $69 billion market cap and its $26 billion of debt and preferred stock under the restructuring plan. Using market valuation multiples of five times that means New G.M. must generate operating cash flow somewhere in the order of $19 billion annually.

That would require both increasing annual sales to some $150 billion, almost 50 percent more than the entire company, shorn of its various financial and international businesses, is expected to generate this year, and matching the whopping 14 percent operating cash flow margin that Toyota achieved in its best year ever. It requires a vast leap of faith to believe that can happen.

Robert Farago
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  • SpeedRacerrrrr SpeedRacerrrrr on May 31, 2009

    @Pch101 I believe you’ve interpreted this without paying mind to what has actually happened. The task force’s jobs are to find a new owner and to cram down the debt so that the balance sheet clean up is as cheap as possible. I'm not disagreeing with you. I think I see quite clearly what is happening. As I said previously "It’s a short-term political answer that will lead to another, and another, until whatever is left of GM is finally sold off/absorbed/merged with another company". The fates of GM and Chrysler were destined to end up in foreign hands I think this one statement summarizes what may be a generational divide in this country. There was a time in history when a statement like this made in public would have seemed very strange. These days we just let it happen. It's very sad. I know I know, we have no choice. I've heard it all before.

  • SpeedRacerrrrr SpeedRacerrrrr on May 31, 2009

    @agenthex If you don’t like being in that situation, then I suggest planning properly so it doesn’t happen Some of us have tried harder than you know. Of course, Pch101 has summarily written off American talent, so maybe it was a losing battle all along.

  • KixStart KixStart on May 31, 2009

    Martin B summed it up: "I don’t see a problem with the NYT article. The govt will have loaned GM $50B and own 72.5%, which means they need a $69B market cap, which together with $26B in debt and prefs, means GM needs to be valued at $95B. Rule of thumb is valuation = 5 x operating income (EBITDA, approx), so if GM can sell $150B worth of vehicles at a 14% margin they can do it. That’s 50% more sales than they are doing now, at a margin Toyota has achieved only in its best years. What are the chances? Nil." But part of the valuation of a company is expectations. If people think GM will turn it around, that the new product and structure leads to further success, the stock price will rise. Of course, if the New GM is heavily into projects that are thought to be losers (like the Volt) or the Daewoo-supplied vehicles look like they'll continue to be losers... --- Speed Racerrrr, Getting rid of Wagoner simply sent an important message. Henderson's not any better but he's also not any worse. Lutz then volunteered to retire. Two down. --- PCH101, I think you are about right. As for who we ultimately get to run it, I think we do want someone with manufacturing experience and who has dealt with unions.

  • Pch101 Pch101 on May 31, 2009
    That’s close - consider my addendum: “The point of a task force is not to run a company, but to find people who can” do so in a politically acceptable manner - by not closing too many factories, not transferring too much manufacturing overseas, not selling too many trucks, never opening a non-UAW plant in a right-to-work state, and not NOT making a profit. So far, there isn't any prove of this, and a fair bit of evidence to the contrary. Wage, benefits and job cuts have been part of the negotiation process. The UAW is pretty well gutted; look objectively at this, and it's clear that they are not coming out of this as winners. Have you seen the new Chrysler TV spots? The 300 plays a prominent role in them. They have no problem marketing gas guzzlers if they make money. There is a clear agenda to reposition the brands as multi-faceted companies that can make good cars, and not just trucks, and all sorts of cars, not just large ones. That's pretty much what any smart turnaround team would be doing. Being pigeonholed into the gas guzzling truck camp has been part of the problem here all along. We've all heard the stink about GM outsourcing future production to China. So they're retrenching into the US; the US is half of GM's market, and a solid turnaround effort will use that as an advantage that can entice the foreign buyer needed to make it happen. I was skeptical myself, but the government has made more smart moves in a few months than Detroit management made in a few decades. Give credit where it's due, and don't allow your political biases or previous expectations to obscure you from seeing what business-savvy actions are being taken. On the whole, I'm pleasantly surprised. Pch101 has summarily written off American talent I'm just accepting the reality that Americans destroyed the business, and that there aren't enough Americans available to lead a turnaround. Some months ago on this site, I noted that the list of players outside of China and Russia would be limited to the likes of Renault, Fiat and Magna, and that's who is stepping up. It makes no sense for Ford to do it, so whom else would you suggest? I think we do want someone with manufacturing experience and who has dealt with unions. Agreed. People can whine all they want about the union, but a new GM and new Chrysler will need blue collar work forces to build cars, with minimal delay once their operators are ready to move. It is faster and ultimately cheaper to keep a lot of the existing payroll than to replace every single grunt on the line, when it would take months or years to hire and train that many people. They obviously aren't going to keep everyone.
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