What's next for a humbled GM after its bankruptcy?

McClatchy NewspapersJune 1, 2009 

WASHINGTON — Now that General Motors has filed for bankruptcy protection from its creditors — a humbling moment Monday for an icon of American manufacturing — the question from Wall Street to Main Street is whether its nationalization and restructuring plan can work.

The bankruptcy filing, encouraged by the Obama administration, is a high-stakes gamble that GM, with the help of another $30 billion in U.S. taxpayers' support, can emerge as a smaller, more nimble company free from the debt and other burdens that long have plagued it.

The U.S. government will own a 60 percent stake in a privately held GM when it emerges from bankruptcy, and the company will be a private rather than publicly traded firm, for a period that the government hopes will be no longer than 18 months.

Analysts call the Obama strategy a gamble, given GM's years-long decline in market share to foreign-based rivals. In laying out his vision for GM, however, the president said that his team had at least given the carmaker a fighting chance.

"Instead of taking so much stock in GM, we simply could have offered the company more loans. But for years, GM has been buried under an unsustainable mountain of debt," President Barack Obama said Monday. "And piling an irresponsibly large debt on top of the new GM would mean simply repeating the mistakes of the past."

Fritz Henderson, GM's chief executive officer, said he understood that the company had a tremendous credibility problem with consumers that it would have to overcome.

"The only way to convince people is to produce results," he said.

For a period that Obama hopes will be no longer than 90 days, GM will ask a bankruptcy court to free it from some of its debt and rearrange its obligations to suppliers and other creditors. The automaker will close 11 to 14 plants, complete a steep reduction in salaried and hourly workers, and shed brands such as Saturn and Hummer and a large part of its 3,600 dealers.

There will be lots of losers in the process, and while that's normal during any bankruptcy proceeding, this one will be wildly different. The U.S. taxpayer, through the government's 60 percent ownership stake in the company that emerges, is the biggest stakeholder. There's never been a bankruptcy proceeding quite like what awaits GM.

"This is historic. One of the reasons is because of the size. But large companies can also be restructured if there is the creativity and the determination. A large company can and often is restructured, but there has to be both of those," said Sheon Karol, a turnaround specialist for CRG Partners, a consultancy that works on corporate restructuring.

Although Obama and members of his automotive task force say that they'll play no part in decisions about where to close plants and which suppliers to keep or cut, all those decisions will have political consequences. GM will make the decisions, but the company now answers to the Obama administration.

"There is now a question about the political aspect that is a novel factor in this Chapter 11," said Karol, who's helped restructure supermarket chain Winn-Dixie and other large corporations in bankruptcy. "I think that a concern one has to have in this situation is . . . that the tool of Chapter 11 should not be dulled by political considerations, and I think that is going to be one of the challenges."

Members of Congress already are sharpening their knives in hopes of influencing the process.

It's also not clear how a new privately held GM, which no longer will have to make public regulatory filings to shareholders, would communicate its decisions. The partial nationalizations of Bank of America, Citigroup and insurer American International Group since last September have been marked by political fallout when taxpayers lent money and companies still paid lucrative executive bonuses, used corporate jets and hired well-heeled lobbyists.

Steve Rattner, the head of Obama's automotive task force, said late Monday that GM was being encouraged to communicate to investors and the public as if it were still a publicly traded company. That means it's likely to issue reports on sales and earnings, and Rattner said that GM would be encouraged to report something similar to regulatory filings when it made significant changes that affected stakeholders.

In an immediate change, shortly after GM's 8 a.m. bankruptcy filing in New York, an announcement followed that it would be removed from the Dow Jones Industrial Average. The deletion marked a low point in the carmaker's 100-year history, and its removal from the list of American blue-chip companies served as a powerful reminder of how far it's fallen since the U.S. recession began in December 2007.

Also on Monday, turnaround specialist Albert Koch, who helped retailer Kmart emerge from bankruptcy, was named the chief restructuring officer at the new GM. Henderson said Koch would be in charge of administering the assets that wouldn't be acquired by the new GM emerging from bankruptcy.

There was immediate speculation about Henderson, who became the CEO when the administration "encouraged" Rick Wagoner to give up the post on March 30. Like Wagoner, Henderson is a career GM executive with a virtually identical career trajectory, linking him to what Obama called "the end of an old GM."

Rattner, the task force chief, said Henderson's fate depended on the new GM board now being set up.

"Every CEO in America serves at the pleasure of the board," Rattner said, adding that Henderson has delivered on what was asked and "he's running and running hard."

Under the restructuring plan, the Canadian federal government and the provincial government of Ontario together will take a 12.5 percent stake in GM. Union workers, through a trust, will own 17.5 percent and bondholders another 10 percent.

U.S. taxpayers will contribute $30 billion to the turnaround effort, the Canadian federal and provincial governments another $9.5 billion and $10 billion will come from the debt-for-equity exchange with GM bondholders, who took steep losses in exchange for the possibility of large gains if and when the carmaker gets back on its feet.

GM has struggled to make and sell 16 million autos a year to turn a profit. That break-even point will drop to 10 million under the new company, not much above the current sales numbers of 9.5 million.

GM also has committed to producing a small, fuel-efficient vehicle in the United States as a condition of its deal with auto unions.

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