Tomorrow's WSJ: Government Forces Out Wagoner at GM
Executive Agreed to Step Down After U.S. Asked for Resignation in Return for More Bailout Cash; Henderson Takes Over for Now
• MARCH 30, 2009
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By NEIL KING JR. and JOHN D. STOLL
The Obama administration used the threat of withholding more bailout money to force out General Motors Corp. Chief Executive Rick Wagoner, marking one of the most dramatic government interventions in private industry since the economic crisis began last year.
In wrestling with the economic crisis, the government has demanded the ouster of the head of American International Group Inc., but only as it took a majority shareholder position. In this case, the administration has ousted a major CEO as part of an ongoing restructuring.
The move also indicates that the Treasury Department intends to wade more deeply than most observers expected into the affairs of the country's largest and oldest car company.
Mr. Wagoner has been CEO since 2000 and has managed the company through some of its most difficult moments. The company has not logged a profit since 2004, reporting losses since then of $82 billion, and it nearly ran out of money at the end of 2008 before the Treasury Department provided emergency loans. GM's stock was trading above $70 when Mr. Wagoner took over as CEO in June of 2000. Shares closed last week trading at $3.62, placing the company's market capitalization at $2.21 billion.
Mr. Wagoner's tenure came amidst extraordinary challenges that weren't entirely of his own making—including costly retiree benefits and union contracts that predate him and the recent deep recession. Yet GM by most measures performed worse than other auto companies. Among the key decisions that hurt the company: a huge bet on gas-guzzling trucks and SUVs that piled up in dealers' lots unsold as high gas prices drove Americans to look for more fuel economy offered by rival companies.
An administration official confirmed that Mr. Wagoner was asked to step down to make way for ongoing restructuring within the company. Mr. Wagoner will be replaced, at least on an interim basis, by Frederick "Fritz" Henderson, the company's chief operating officer.
Mr. Wagoner was asked to step down on Friday by Steven Rattner, the investment banker picked last month by the the administration to lead the Treasury Department's auto-industry task force. Mr. Rattner broke the news to Mr. Wagoner in person at his office at Treasury, according to an administration official. Afterward, Mr. Rattner met one-on-one with Mr. Henderson, who will fill in as GM's CEO.
GM didn't immediately return calls for comment. One longtime GM board member, Kent Kresa, declined to comment when reached by phone Sunday night.
The ouster comes as President Barack Obama prepares to give billions of dollars more in aid to struggling auto makers GM and Chrysler LLC, but only if all sides—including unions and bondholders—show that they are ready to sacrifice.
President Obama plans Monday to lay out the administration's interim conclusions on the companies' viability and the many steps that need to be taken to return the companies to health.
The president is likely to hold off on granting the companies $21.6 billion in new loans to preserve leverage in negotiations, particularly with the thousands of bondholders who hold a total of about $28 billion in GM debt.
In remarks Sunday, Mr. Obama said that he intends to extract "a set of sacrifices from all parties involved—management, labor, shareholders, creditors, suppliers, dealers." The industry, he said on CBS's "Face the Nation," must "take serious restructuring steps now in order to preserve a brighter future down the road." The two companies "are not there yet," he added.
Mr. Wagoner's removal shows that the sacrifices could cut deep. The departure of the company's top executive promises to further shake up a company that has already been through considerable change over the past six months. The 56-year-old executive had been scrambling to craft a global strategy aimed at maintaining leadership in the global sales chase with Toyota Motor Corp., and making big profits in emerging markets.
But Mr. Wagoner's plans came crashing down in the second half of 2008 as the company ran short of cash and was forced to ask the federal government for tens of billions of dollars in aid.
At the same time, his executive team started dismantling several parts of the company, including a plan to shed several U.S. brands, slow the pace of new-product introductions and sell off stakes in international operations.
With Monday's announcement, administration officials said they will lay out the parameters of an overall restructuring of the companies, including some firm deadlines. The administration is expected to hold out the threat of having the companies enter into Chapter 11 bankruptcy restructuring if certain tough compromises aren't made over the next month.
The president's auto task force has spent more than a month digging into the restructuring plans that GM and Chrysler submitted last month. The team has struggled to make two determinations: when will the steep plunge in car sales end, and what will the market look like once it revives.
GM, which hasn't logged a profit since 2004, has based its revival plans on the U.S. market rebounding to sales of 14.3 million vehicles a year in 2011, up from a rate of around nine million vehicles so far this year. Many analysts now consider GM's short-term forecasts to be overly optimistic.
An administration official said it was unlikely that the auto team would push for the removal of Chrysler Chief Executive Robert Nardelli, especially while Chrysler is in discussions to form an alliance with Italy's Fiat SpA.
The two companies received a total of $17.4 billion in government loans in December, and have requested another dose to keep them going through this year. Of the $21.6 billion, GM is seeking $16.6 billion more, while Chrysler has asked for $5 billion more.
Among a heap of challenges the administration faces, foremost are the efforts to draw steep concessions from the United Auto Workers union and from the bondholders.
Attempts to solidify deals with the UAW and bondholders have been slowed by disagreements by both parties over how exactly the other party needs to budge. The UAW, for instance, insists it already made health-care concessions in 2005 and 2007, and argues that the bondholders have never been asked to concede anything.
"I don't see how the UAW will do anything until they see what the bondholders will give up," one person involved in the negotiations on behalf of the UAW said Sunday.
The bondholders say that they are willing to make concessions, but they want to see the union make further cuts. The fact GM raised most of the unsecured debt to fund union health-care and pension costs is also seen as a reason why the union needs to take bigger steps.
The government is pressuring the bondholders to agree to an equity swap that would reduce GM's debt load by two-thirds.
With Mr. Obama potentially holding off on new loans until concessions are made, analysts said GM likely has enough cash on hand to weather at least another month before its need for more government aid becomes urgent. Chrysler, which is owned by Cerberus Capital Management, may need another infusion of cash sooner. Ford Motor Co. hasn't sought federal assistance, saying it has enough cash on hand to cover its own expenses.
Both GM and Chrysler are negotiating with the UAW to accept a range of cost-cutting measures, including a greatly reduced work force, lower wages and a revamped health-care fund for retirees.
The U.S. auto industry, hardly robust to start with, has been reeling from a plunge in car sales over the last six months. Sales in February were down about 40% over the same month last year. The drop has sent shock waves through the hundreds of smaller parts companies that supply the big auto makers. To keep the sector afloat, the administration recently announced a $5 billion financing facility to help suppliers cover their expenses.
"We think we can have a successful U.S. auto industry," President Obama said on Sunday. "But it's got to be one that's realistically designed to weather this storm and to emerge—at the other end—much more lean, mean, and competitive than it currently is."Treasury Secretary Timothy Geithner, who is nominally in charge of overseeing the auto bailout, said on Sunday the government was prepared to lend more money "if we believe it's going to provide the basis for a stronger industry in the future that's not going to rely on government support."
The original December loans were given under the agreement that all sides would strike a compromise deal by March 31, but the administration is taking advantage of a clause allowing all sides another month to negotiate.
"It was unrealistic to renegotiate a new labor agreement and the unsecured debt in so short a time," said Sean McAlinden, chief economist with the Ann Arbor, Mich.-based Center for Automotive Research. "That has never happened before."
GM and Chrysler are meant to submit by Tuesday assessments of where their restructuring efforts are heading.
Write to Neil King Jr. at neil.king@wsj.com and John D. Stoll at john.stoll@wsj.com
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