Skip to comments.Wall Street speculates on General Motors bankruptcy
Posted on 04/20/2005 8:21:13 PM PDT by WildPlum
The speculation on Wall Street last week was how long it would be before General Motors declared bankruptcy. The share price fell more than 15% last week ahead of today's first quarter results as the scale of GM's problems became clearer.
The adjustments that the company has made to its production schedule in the first two quarters of 2005, and the warnings from credit rating agencies that the companys huge debt faces downgrading to junk bond status has focused America's financial markets on the problems of the world's largest carmaker.
GM's share price in the past 12 months
Source: MSN Money
Wall Street can over-react both on the upside and on the downside, and the crisis of General Motors is probably not as imminent as investors seem to fear. Two years ago the investment community saw General Motors as an example of how an aggressive price and volume led strategy could solve some of the carmaker's problems. That was too optimistic but GM is after all still the market leader in the world's largest vehicle market, and it has a product renewal program that gives it at least one more shot at stabilising its market share in its core market.
There will be a rebound and the company will claw back perhaps a couple of points of market share as its new models arrive in the next two years.
GMs falling share price is a reflection of the anticipation of bad news, and when the bad news actually arrives people may start to look again at some of the upside potential of the company.
Small chances of long-term turnaround
But it is difficult to see a long-term turnaround path for the group. The problems of General Motors have been widely known and recognised for at least a decade, but the company seems incapable of taking effective action.
Almost no one outside the company expects GM to reverse its steady long-term secular decline in market share in North America.
The company's products are widely panned as uninspiring. The discounting and incentivisation of the last three years has flooded the market with nearly new GM products.
Fully a third of GM's new vehicle sales are to employees, their relatives or fleet rental buyers, while private new-car buyers are staying away from GM's profile in droves.
The company is suffering from the liabilities and attitudes that entrenched themselves decades ago when the company dominated the North American market. GM has studied Toyota but not taken any effective action to adapt its own culture to complete.
The company carries a heavy burden of health care costs and pension liabilities that represent a structural disadvantage on every car produced that the company seems powerless to address. The company persists in a confrontational approach to negotiations with suppliers that may have made sense when the company was the leader of an oligopoly and was seeking to extract monopoly rent from suppliers that had nowhere else to go, but which is perverse as a strategy when new domestic assemblers already represent a much more attractive prospect as a customer.
The latest round of negative talk about the companys future will add to the self-inflicted wounds of poor purchasing and product development strategies and ensure that it sinks further down the list of preferred customers of the more innovative and capable suppliers.
Prospects of LBO (leveraged buyout) seem slight
Although General Motors is not in any imminent danger of collapse, investors in New York that we talked to were uniformly pessimistic about the company.
There seems to be no mechanism for a renewal of the company short of bankruptcy.
In the past it would have been thought that GM's size meant that it was practically impossible to envisage an LBO of the company -- but the revelation in last Friday's Financial Times that Deutsche Bank had been approached about an LBO of DaimlerChrysler suggest that size alone is no longer an obstacle, and a few years ago Carl Icahn looked at putting together a buyout of GM. But although some such dramatic change appears to be the only way that GM can achieve the culture change that is necessary - short of bankruptcy - it looks a remote contingency.
Unless GMs pension and health care liabilities can be addressed the companys intractable cost position is practically a poison pill to would-be acquirers. And turning the company around would be a lot harder than at DaimlerChrysler, which has shed some of its over-ambitious commitments over the last year such as Mitsubishi, and could probably quite easily shed others such as its smart brand operations. DaimlerChrysler has created product and productivity momentum in its Chrysler operations in North America, and Mercedes-Benz remains an immensely valuable and only slightly tarnished brand. In addition there is a depth of management talent within the company obviously available to do the job. General Motors has none of those advantages - only marginal businesses such as Cadillac have made any progress in their product positioning of the last years. The company's overseas operations remain a drag on the group's performance, and the prospect of a radical cultural change in management approaches or UAW strategies appears very distant.
Despite the severity of General Motors situation, last week's management reshuffle appears to be doing little more than rearranging the deckchairs on the Titanic.
In the meantime, supplier and consumer confidence in the company will ebb further.
Of course, we the taxpayer will have to compensate for the promised pensions.
Also, Chrysler and Ford would soon follow to remain in the game.
Might have helped if they redesigned rather than axed the F-body to compete with the Mustang
they will receive loan guarantees from the US government to stay in business.
way to much GM bashing on FR. This company saved the US economy from going into a deep recession after 9-11 by moving forward with 0% financing. Their newer model cars are fine.
and it says alot about our economy that our auto businesses are dying, while profits are flying high at brokerage firms. the "paper economy" of real estate swaps and bond trades is our strength now, while US companies that actually try to do engineering and manufacturing are dying.
GM is now involved in Nation Building?
I doubt they will get loan guarantees. The general opinion in Congress seems to be "too bad", as it is on the streets.
Their newer product, with the exception of the RWD product (few and far between) is absolute *crap*. Nobody is buying it. Though they are buying the RWD stuff, they have officially killed off the low-cost RWD platform that was going to revolutionize their lineup. Ooops.
US companies that do engineering and manufacturing without the battleship chain and anchor of a UAW or CFL or other enormous fat bloated union around their necks are doing just fine. Of course, I refer only to those with clueful management, which GM doesn't have either.
Short sellers highly organized and determined. Bad news, bad news, this is scary, watch out below, etc., etc.
I agree. Way too much paper trading and speculating. Way too little actual production. The gas prices are in part due to speculation....paper trading.
the Kappa RWD cars will be produced.
America has been poisoned by too much credit!
They don't need or want loan guarantees. They just want to break the union contracts and wipe retiree committments off their books.
After that, they will be fine while the taxpayer picks up most of the pension obligations.
Yet again, other group of voters that will be dependent on gov't funds.
Now that's serious union busting. China is licking it's choppers.
We see here the concept of deep and serious poop.
that and the insuance companies just go wild over the Z/28 and Trans-Am cause they'll do over 150MPH... my 94Z is on it's third carrier. most of the kids that can afford them can't get them insured, or if they can... they can't afford it
But Zeta, which is the sedan platform, has been killed. Kappa cars will not make a huge percentage of sales - convertibles/coupes never have. Their bread and butter are sedans, and they have nothing in the pipe that's interesting. The G6 is a pile of crap, the Impala is a joke with no replacement in sight, the Malibu is an embarassment... I can go on and on.
That is a bit of a stretch but it does help. I bought a 2002 Ford Ranger, 4X4, off road package, for $0 down and 0% interest financed by Ford Credit.
I should have bought two.
Yeah I know, I own a 1998 Z28. I'm under 25.
The insurance was more than the payments (paid the car off though!).
GM's Balance Sheet:
Total Cash - 26.39B
Total Cash Per Share - 46.75
Total Debt - 291.83B
Total Debt/Equity - 11.399
How about GM's Holden division from down under.
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