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A Chapter 11 affair to remember
The GM turnaround is considered by many Americans to be a vindication of their belief in the power of their companies as well as their government. They need a very quick reality check

When it was officially announced that GM had become the world’s largest automaker, you know that this is one helluva brownie point opportunity for US President Barack Obama in election year. He did take a bow in November 2010, when GM returned to the bourses, and jubilantly exclaimed that the company was now in a position to return more than what US taxpayers had invested and that since GM & Chrysler emerged from bankruptcy, the US auto industry added some 75000 jobs. And it was a return to pride for America, wasn’t it? Yet, the $50 billion bailout happens to be one of the most intense controversies of Obama’s term.

The sordid story began even before Obama took his last victorious lap towards the White House. Gross mismanagement over the years seemed to be getting GM nowhere, and the company posted record losses of $38.7 billion in 2007. The then CEO Rick Wagoner inexplicably expressed satisfaction at the results. But the $31 billion loss in 2008 (revenue down by 2/3rd yoy) was quite understandable (considering Wagoner’s benchmarks on CEO satisfaction!). By the end of 2008, GM had cash of just around $14 billion. Under the George Bush administration, the beleaguered automaker, along with its much more troubled Detroit cousin Chrysler, was down but not by any means out. They refused bankruptcy filing, and instead got a $17.4 billion bailout package from the Troubled Assets Relief Programme (TARP) after a heavy debate at Capitol Hill ($13.4 billion was received by GM). It was the good ol’ ‘too big to fail’ American logic at work again. GM was asked to bring in a viable recovery plan, which it failed to do so by March 2009. New president Barack Obama’s administration got Rick Wagoner out and asked GM again for a viable recovery plan (which primarily involved settling of dues with creditors & UAW) by a new deadline of June 1. More loans were extended to the duo, amounting eventually to $77 billion in TARP funds (GM was allowed to write off around $45 billion in losses). Still, GM failed even that deadline. June 1, instead, became the date when GM filed for Chapter 11, with its debt ($172.8 billion) amounting to over twice the value of its assets. The Treasury & GM also secured mutually acceptable deals from the unions & creditors so that the proceedings went uninterrupted.

There were several aspects to the way that this bankruptcy was handled that invite scrutiny. One was the complete transfer of assets from the old GM to the new GM; a sale of assets in legal terms, but a reorganisation in practice. Practically, the two are very different. Todd Zywicki, Professor at the George Mason University School of Law, commented on the section 363 asset sale in one of his notes, “These sales violated the longstanding bankruptcy principle that an asset sale should not be functionally equivalent to a plan of re-organization for an entire company — what bankruptcy lawyers call a ‘sub rosa plan’. The reason is that the re-organization process offers all creditors the right to vote on the proposed plan as well as a chance to offer competing re-organization plans, while an asset sale can be carried out without such a vote.”
The actual return from bankruptcy surprised everyone, as the new GM came out of Chapter 11 within 40 days. Once it did, it had the following ownership structure: 60.8% owned by the US Treasury, 10% owned by the bondholders who GM owed some $27 billion, 17.5% by the UAW and 11.7% by the governments of Canada & Ontario. Within this time, loss making brands Pontiac, Saturn, Hummer and Saab were given up on while retaining Chevrolet, Cadillac, GMC and Buick; and the number of dealerships were reduced by a third. Around 20,000 workers faced the axe in 12 manufacturing facilities that were shut down. Owners of shares in the original GM lost all their money. In all, 31,000 workers are expected to be axed by 2012 (many thousands more at closed dealerships), and benefits were cut for existing workers & retirees. And as reports suggest, workers that join in future would also receive a much lower compensation at around $14 an hour. However, as a Citi Investment Research analyst Itay Michaeli projected, this was expected to bring down GM’s cost per car to $5,772 by 2012 from $10,400 in 2009 and make it more cost competitive than the Japanese. Critics lament, however, that while UAW got significant benefits, which included ownership of a multi-billion dollar retiree fund, America’s workers ironically got much worse than a raw deal. The other fairly common argument is that such bankruptcy assistance encourages more strategic and financial mismanagement by large companies in particular, as the government has a safety net ready.

And what about taxpayers? The IPO was a watershed event for the Obama administration, which made $11.7 billion from the sale of 358.5 million shares at the IPO price of $33. Considering the loans repaid, GM still owes around $25.5 billion to taxpayers and the government owns 500 million GM shares. That means that the government has to wait for shares to reach a price of $51 before selling them off to break even. The fact on the ground is that GM shares are languishing on the bourses, trading at $24.92 at the close of January 23, 2012. Analysts across the board are quite unanimous that what was lost by taxpayers will stay lost forever.

GM is in the pink of health for now, with a net income of $1.7 billion in Q3, 2011, and is also world number 1 again in sales (9.025 million units sold) for 2011. But the results on the sales front ignore the bad year that Toyota has been through with the earthquake and the aftermath of the recalls. GM’s best bottomline performance for the quarter was with respect to North America, where it had an EBIT-adjusted at $2.2 billion. People have low optimism on US for the long term, and GM’s continued dependence on the same can be cited as one reason for its stock market performance. Its international operations division, which include emerging markets, posted a EBIT adjusted of just $0.3 billion (even as it’s posting impressive volumes in China). In a market like Asia, it has not just Japanese, but far more cost competitive Asian players to contend with. And while the government promoted Chevy Volt did ‘exceedingly’ well last year with sales of 7671 units in 2011 (touted as the wonder car), the figure looks drastically unimpressive considering that the car was selling in 2600 dealerships (each dealer selling an average of 3 in the year). Besides, the corporate sales of Volt have been a subject of controversy, with GE allegedly having committed to buying a number of Volts to show a rosy picture as part of a shady corporate deal.

So was the GM bailout/bankruptcy/asset sale/reorganisation/government control... whatever you call it... the blessing that the Obama administration assures it is? Or was it a neatly orchestrated PR exercise; hiding the sad reality that all that the government did was to delay the inevitable, and make it much more expensive than before?

By:- Virat Bahri

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