Wall Street speculates on General Motors bankruptcy

SupplierBusiness.COM ^ | 04-18-2005 | SupplierBusiness

[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 company’s 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.
GM’s 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 company’s 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 GM’s pension and health care liabilities can be addressed the company’s 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.

[ikka]

Have never bought a GM.

My mom had a 1988 Buick Park Avenue that ran forever, except the paint crazed and went white (on a black car) and they would not cover it though clearly the paint was defective. Several years later she bought a 1994 LeSabre with the same engine, except the interior was even crappier.

Aside from the 3.8L V6, which was designed in either the late 50s or early 60s, the cars have no redeeming features.

My first car was a VW Golf, then a Saab 9000 Turbo (loved it), then a Saab 900 (tanklike but not as refined as the 9000), now a Toyota Echo ... next car or pickup will also be a Toyota.

[185JHP]

BTTT

[oceanview]

its generally regarded as true, see the "AutoMakers to the Rescue" section. Many other articles on this topic.

http://www.andersoneconomicgroup.com/Pubs/Press_Clips/2003/sept_dec/OaklandPress_sept11cost_090703.pdf

[Spktyr]

After the sales failure of the GTO (aka the Holden Monaro; caused by crappy advertising that nobody ever saw), GM USA has dropped plans to import *anything* else from there. Which is stupid, because the GTO is the best car I've ever seen with a Pontiac badge, and easily the best interior in any GM product ever sold in the US.

I've said this elsewhere - they need to fire everyone at GM's HQ except for the Cadillac and Vette guys and replace them with the Australians.

[Moral Hazard]

""AutoMakers to the Rescue" section."

This almost qualifies as a source. They claim that "man analysts and economists" believe that 0% financing pulled the economy out of recession. However they don't quote a single economist or analyst to this effect, which seems kind of odd to me.

[thoughtomator]

A GM bankruptcy would be worse for the unions which are driving US competitiveness in certain industries into the ground, than it would be for the corporate world.

Let it happen. The US economy can survive it more smoothly than many seem to expect.

[SAJ]

Aw, c'mon, MMTU. That's a bit silly. I'm not short a single share of GM, but there's nothing at all wrong with short-selling. It's neither immoral nor un-American -- if a company is running its a&& into the ground, why should a trader NOT assist the process, eh? Purest capitalism, nothing else, mate. After all, you and I didn't cause -- in the case of GM -- management to sign idiotically costly contracts with labour, nor, in the case of FNM, did we advocate or encourage management's overparticipation in derivative instruments. If management insist upon screwing up, why should you, I, and anyone else not earn a profit from their screwup? Is there some reason why we passively take losses when management bite the big one?

I can't even imagine who would buy shares in Fannie right now, and I've been short FNM @ 67.70 for some time.

If one considers, on some reasonable basis, that a stock is likely to decline in price, why in the world would you, or I, or anyone else, NOT short it (assuming of course that the shares can in fact be borrowed)?

[Nowhere Man]

They need to make vehicles like this again:



1968 Buick Wildcat

[umgud]

I'm 15 years from retirement and while I don't own GM, blue chips helped save me during the dot com bust. I really hope they can pull out of this without pulling down others. Us old ba$tards don't like uncertainty.

[japaneseghost]

GM's share price in the past 12 months

Sounds like a good time to buy GM stock.

I wouldn't put it past Deutsche Bank to do some kind of deal to buy out GM.

DB just bought out a big US mortgage company in Boston, and they're looking for US assets because German law just changed last year allowing them to do so.

DB has some really, really bright people in their NY office.

[July 4th]

Anyone want to get together on an LBO of GM?

[Chode]

i also think Z sales hurt Vette sales... the standard Z is about 7/8 of a Vette for less than half the price, in in 94 the Z was THE MOST bang for the buck you could get... i ordered mine right from the factory with everything except power windows( so i could get the BOSE Sound System where the window motors went) and electronic dash(i like gages)for only $18,000.

[norraad]

Yep, they had "it" at one time.

I like the part of the article where GM looked at what Toyota was doing and said "naah we don't want to do that".

Meanwhile my 18 year old toyota has 224,000 miles on it and runs like a top.

[LibertarianInExile]

Agreed, and I wish it were EASIER to short companies. It would encourage the breakup of underperformers by pressing down on stocks, which desperately needs to happen more often in compensation for the overall market surge resulting from Boomer catchup investments for retirement.

[montag813]

they will receive loan guarantees from the US government to stay in business.

And why not? the stupid airlines got tens of billions of our money, and we could lose half of them with less impact than a GM failure would have.

[Eva]

I love some of the new Cadillacs and I never thought I would say that. It's too bad that they are so expensive.

[Ronaldus Magnus]

Watch for a UAW buyout like American Airlines. It will be equally successful.

[Fitzcarraldo]

Time to start revvin up them rickshaw and rice bowl assembly lines -

[danmar]

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.

Save the US economy...give me a break! Are you for real?!...If that were to be true, it was because only in such conditions GM will sell any of their 50's technology sh!twagons.

GM overcriticized on FR; since when is GM excused from criticism, for delivering sub par products and charging premium prices for?!

General Motors is a fossilized shrinking giant from a bygone era, clinging to the Crown, unable to adapt to the new market forces and the unrelenting challenges coming out from Japan and Germany.(even the Koreans started to make better cars than GM, after they've got their asses whooped)

I would not shed a tear if GM goes belly up...