Bye, Bye Wagnor. Hello Viability for GM?
On Sunday, GM CEO Rick Wagnor resigned after significant pressure from the Obama administration. The administration threatened to withhold the much needed bailout funds GM currently needs in attempt to “smoke out” Mr. Wagnor. Needless to say it worked. Frederick Henderson, G.M.’s president, will takeover as chief exec.
GM has used up the $13.4 billion in bailout funds it received in December 2008 and is in dire need of cash to continue operations. The Treasury has agreed to extend GM enough cash to operate for the next 60 days. By then the company must prove its long-term viability through a rigorous restructing plan, more rigorous than the one submitted last month, which did not prove sufficient to Administration officials. Officials have made it known that bankruptcy is still a very likely possibility for GM. If bankrupcty is the only option for GM, administration officials have indicated that it will be expedited and highly supervised to ensure proper disposal of GM’s debt and contractual overload.
Here is a quick synopsis of why GM is where it is today:
1) Costly retiree benefits and union contracts.
2) Over-investment in trucks and SUVs that were left to collect dust on dealerships due to high gas prices causing people to move to fuel efficient cars which GM had only a limited supply of.
3) The current recession, which has consumers not buying cars.
When Rick Wagnor took over as CEO in 2000, GM’s stock was trading at over $70 and now after his departure GM’s stock is worth $2.70 (as of 10 am today). In order to assure skeptical consumers reluctant to buy GM, the U.S. government plans to guarantee all warrantees on news cars.
Here is what GM must do under the terms of December’s bailout funds as well as to ensure future viability:
1) G.M. must substitute company stock for half of the $20 billion it owes to a new health care trust for retired union workers and surviving spouses.
2) GM must reduce its $27 billion in unsecured debt by two-thirds. The current offer of 15 cents on the dollar value of the bonds was turned away by the committee representing bondholders. Most of this debt was taken on to cover obscene health care and pension costs for union workers. GM may offer bond holders the option to swap debt for equity (shares of GM).
3) Under GM’s current restructuring plan, it must eliminate of 47,000 jobs worldwide and significantly reduce brands, models and dealerships.
4) Replacement of the majority of current directors to generate a plan that ensures viability.
Many people would be content to see the U.S. government cut-off GM and let them fail, but GM has an extensive supply chain which creates many jobs and GM itself employs over 100,000 people in the U.S. Its failure would have a ripple effect throughout the U.S. economy, which would cause even more hardship than there currently is. But it is now getting to the point that GM may not be viable in the long-run and the government cannot continue to give good money after bad. According to Ombama’s auto industry task force, GM has made strides in the development of new energy-efficient cars and could survive if it can cut costs sharply, but this may not be easy. In 60 days GM’s fate will be determined and in my humble opinion, it doesn’t look good.
