Thoughts on GM

Exactly two years ago the Wall Street Journal ran a story outlining why bankruptcy is what GM should be pursuing instead of bailouts: See Article Here. Some key quotes:

General Motors is a once-great company caught in a web of relationships designed for another era. It should not be fed while still caught, because that will leave it trapped until we get tired of feeding it. Then it will die. The only possibility of saving it is to take the risk of cutting it free. In other words, GM should be allowed to go bankrupt.”

“After 42 years of eroding U.S. market share (from 53% to 20%) and countless announcements of “change,” GM still has eight U.S. brands (Cadillac, Saab, Buick, Pontiac, GMC, Saturn, Chevrolet and Hummer). As for its more successful competitors, Toyota (19% market share) has three, and Honda (11%) has two.”

“GM has about 7,000 dealers. Toyota has fewer than 1,500. Honda has about 1,000.”

“GM is contractually required to support thousands of workers in the UAW’s “Jobs Bank” program, which guarantees nearly full wages and benefits for workers who lose their jobs due to automation or plant closure.”

“It has other contractual obligations such as health coverage for union retirees.”

“GM CEO Rick Wagoner says “bankruptcy is not an option.”

Wow what a difference two years makes. Yesterday after the close GM emerged from bankruptcy with an IPO priced at $33/share, raising some $20 billion, which was unsurprisingly revised up a few times. If “green shoes” kick in over the next few days the size will be $23 billion. It has been fun pointing out the negative-Nellie stuff, such as 1) the media over-hyping of the IPO with skill not seen since Boiler Room’s Vin Diesel, 2) the hard-to-stomach notion that in hindsight, our government is getting too big, and is too involved with economic and personal liberty decisions, and 3) Too Big Too Fail costs more than the Initial Failures.

Having said that, there is good in this deal, and the new GM:

–       The taxpayers begin to be recouped for the $ $50 billion we spent on a bailout. Most of our repayment will come subsequently over the next few years with future stock sales.

–        The increase in the size of the deal has come largely from increased appetite by mutual funds. I guess this is not surprising, given the lack of important IPO’s in the US over the last few years, China’s RINO not withstanding.

–        The Treasury and underwriters likely want the allocation to go mostly in the hands of long-term investors; you can bet some assurances were given in terms of the allocation.

–       The company has discontinued all but four brands in the U.S.

–       GM has dropped 900 dealerships and has vaporized more than $80 billion in debt.

–       GM has been making cars more in tune with market wants.

What to look for going forward, for signs of success? Well in the short term the deal should trade at more than the 10-15% premium it will likely open at, and it should stay there for a while. Incidentally, if it trades at a 20-25% premium, look for criticism of the Treasury for not getting taxpayers the best deal. In the longer term, this bailout, bankruptcy, and reemergence will have been successful if GM can prove going forward that its legacy costs are just that: in the past. Pensions, bloated brands, bloated dealerships, and dormant infrastructure investments will have to continue to be wound down. If we start to hear chatter every few months about how pending UAW negotiations are going, that is a sign that nothing has changed after all. That will be a sign that out of the cocoon has come an ugly, nondescript moth.