This was written in 05, when GM was still sitting on some cash and the economy/financial sector hadn't collapsed yet. Now take your partisan hat off for a minute and use your sloan education to fast forward the same scenario to 2008/09...
Al
businessweek.com
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Customers
One big risk of a bankruptcy filing is that it would cast such a pall over GM that sales would plummet. Consumers will buy airline tickets from a bankrupt company, but cars are a long-term commitment. Many buyers would worry (unnecessarily, in all probability) that GM wouldn't be able to honor its warranties. No U.S. carmaker has filed for bankruptcy in decades. But retailers such as KMart (SHLD ) and Hechinger and carmaker Mitsubishi all saw sales fall when their financial problems became widely publicized, notes Thomas T. Stallkamp, former Chrysler (DCX ) president and now the industrial partner for private equity firm Ripplewood Holdings LLC.
To stem eroding market share, GM could eventually use the lower costs achieved through bankruptcy to drop prices and lure more buyers, says Diane C. Swonk, chief economist with Mesirow Financial Services in Chicago. But cutting prices further could just exacerbate GM's already severe revenue problems. Its per-vehicle revenue of $21,000 is $3,500 less than rival Toyota's.
Rental car companies, purchasers of about 15% of GM's volume, would get nervous, too. They often sell their used models back to the auto maker. They're worried they would have to liquidate the cars themselves if GM went bankrupt, says Maryann N. Keller, a longtime GM watcher who sits on the board of Dollar Thrifty Automotive Group Inc. (DTG ). And, of course, if the company's retail sales are down, the value of used GM cars would fall, too. "GM should do everything it can to avoid bankruptcy," says Keller.
Suppliers
Big players like parts maker Tower Automotive Inc. and American Axle & Manufacturing (AXL ) rely on GM for a large chunk of their business. If its market share slid more quickly, they would suffer declines in revenue. The carmaker would try to keep the disruption to key business partners to a minimum, but many smaller parts makers could topple into bankruptcy, predicts Stallkamp. He says Ripplewood considered buying one thriving parts maker recently, a company with about $500 million in revenue. But it was too dependent on GM. If the auto maker stopped paying suppliers even just for a few weeks after filing, that company and a handful of others could end up in bankruptcy, he says.
That's why some parts makers are starting to open talks to get paid sooner. GM has already stretched payment terms out to two months in most cases. Suppliers are also trying to diversify their sales with other auto makers, relying less on a GM that will be downsizing for the foreseeable future.
Pensioners and Employees
If GM went belly-up, retirees, workers, and taxpayers could all take a hit. Right now, its $90 billion pension fund is fully funded on an accounting basis. But the government-backed Pension Benefit Guaranty Corp., which acts as a safety net for corporate pension plans, says GM is underfunded by $31 billion.
How that would play out in a GM bankruptcy would be complicated. The PBGC could be on the hook for billions in pensions. The agency also could force the Detroit giant to keep funding its own pension plan even in bankruptcy -- though the company could make the case that it should pay less. Still, GM's 450,000 retirees would get hit: They may end up with smaller pension payouts, and their medical benefits, as well as the health-care plans of existing workers, would most likely be whittled back.
Investors
GM's creditors would also stand to suffer. The company has $31 billion in long-term debt, most of it due in 2023 and beyond. Of $34 billion in cash, $15 billion is in a fund earmarked for health-care liabilities. Who knows how much will be left in a few years? Fitch Ratings analyst Mark Oline says GM will have to spend some cash to pay for its announced restructuring and could still have to pitch in to help its former auto parts arm, Delphi Corp. (DPHIQ ).
That raises the possibility that creditors won't recover their whole investment, as was the case in the bankruptcies of United Airlines (UALAQ ) and telecom firms Winstar and Teligent. By the time of a GM filing, however, many of the company's debt holders may be risk-savvy investors like Wilbur L. Ross. Turnaround whizzes like Ross buy distressed debt to get a voice in restructuring plans and then seek an equity stake when a company emerges from bankruptcy.
Stockholders, however, usually get wiped out. That fact may also play a big role in keeping GM out of bankruptcy. Even if it wanted to file, billionaire Kirk Kerkorian would do everything to fight the move. His 9.9% stake is already underwater by about $350 million. Kerkorian and other large shareholders -- many of whom have suffered longer -- could band together and force management to fix the business without bankruptcy. One source familiar with Kerkorian's tactics says he wants to see a deep restructuring plan done quickly, and outside of the courts.
That would be the best for all concerned, so long as the company faces up to the enormity of its current mess and executes a plan that finally stands a chance of working. |
