Shrinking GM, Part 2

Posted by: David Welch on July 2, 2008

GM is shrinking again. And this time, I’m not talking about its sales, market share or payrolls. The stock price dropped 15% to under $10 a share today, a 54-year low. It closed at $9.98 a share, which is off 72% over the past 12 months.

The reason: In addition to its sales falling 18% in June, Merrill Lynch analyst John Murphy suggested in a research note that bankruptcy isn’t out of the question. GM had $24 billion in cash and a credit line to borrow another $8 billion at the end of the first quarter. With truck sales in a freefall, GM is burning cash quickly. A Chapter 11 filing may not be around the corner—and GM will do anything to avoid it—but it’s not out of the question.

With its stock under $10 a share, there’s another worry. GM’s market cap is now down to a paltry $5.7 billion. Some corporate raider could swoop in and buy control of the company for less than $3 billion. Billionaire investor Kirk Kerkorian could come up with that money, since he tabled a $4.5 billion bid for Chrysler last year. Kerkorian is already invested in Ford, and hence not a candidate for a run at GM. But you get the idea.

So who would want it? Only a brazen risk taker. No one knows when this sales swoon will end. Nor can anyone know if Americans will embrace domestic passenger cars and compacts they way they loved Detroit’s suvs and pickup trucks. The car biz has been the domain of the Japanese and Korean companies for years. If GM and its crosstown competitors can’t learn to boost sales with smaller, more efficient vehicles and generate the kind of profits and cash from them, a financial turnaround will be tough to realize.

Also, any raider who bought GM would be the proud owner of some $40 billion in debt and whatever else GM needs to borrow to get through this acrid era of expensive gasoline, a weak economy and the housing bust. And if they need a guinea pig, just look at Cerberus Capital Management. The company bought 51% of auto and mortgage lender GMAC and then grabbed 80% of Chrysler only to see those two companies stumble. The U.S. auto business is not an easy place to make money. Only a player with a lot of guts and—hopefully—a real plan would make a run at GM.

Reader Comments

nick

July 2, 2008 7:25 PM

$40 billion debt for gm 4 times more six flags debt

Luis B Aramburu

July 2, 2008 7:43 PM

In this GM crisis there is only one unexplainable thing to me: why Wagoneer hasn't been fired. Since he took over as CEO, GM has lost more than 50% of its market worldwide and more than 85% of the market capitalization has gone down the drain. I don't recall any other CEO that kept his job after such a catastrophic performance. Wagoneer HAS to go. The sooner the better.

james M. Anderson

July 2, 2008 9:43 PM

With the failure of GM management to plan for the fuel issue, they should fail, or be replaced. They will have to find a way to be really inventive and not top heavy and slow to react. They deserve their share pricing.

VelSatis23

July 3, 2008 4:35 AM

I don`t get it, all GM has to do, to get back in the car race is to build their Opels or Chevrolets they sell all over the world, in the U.S. They have great success with these cars in Europe and Asia, why shouldn´t Americans buy these cars? Maybe the cars are too expensive to import, but they got a whole bunch of factories that can build them in the U.S.
The real problem at GM is their management, too bad Renault didn´t get a try at turning their business around.

R Nair

July 3, 2008 6:55 AM

I'll buy a share today, but that's all I got. I hope this great American company lives to see a better day.

xavier durant

July 3, 2008 8:40 AM


A real plan isn't that difficult:

1. Dump current management: They have no plan and no measurable goals that anyone can hold them too.

2. Dump about half of GM's models and maybe some brands too. When are they going to admit that their market share is shrinking? After bankruptcy?

3. It may be that bankruptcy is best. Let a judge make the tough decisions in court since no one else seems to be capable of it. Bring it on.

bill

July 3, 2008 9:31 AM

This is actually an opportunity. Take it into BK; that wipes out contracts with the union and it eliminates the franchise agreements with the dealers. Then restructure and go to just 2 divisions: Caddie and Chevrolet.

norman ravitch

July 3, 2008 10:51 AM

I remember when the CEO of GM said that what was good for GM was good for the country. Times have evidently changed.

Raj

July 3, 2008 11:12 AM

TATA may buy the GM...!

Prashant

July 3, 2008 11:25 AM

If GM survives for next 3 years than stock will go all the way upto 30$, thats my estimate. In this 3 years what GM management would need to do is, (1) Streamline GM operations in NA, make it flexible and efficient (2) Increase presence in Emerging Markets (3) Invest in More Customer Oriented Products (Not what GM executives want but what average customer wants, GM always failed here) (4) More Innovative, not just in business processes but on engineering as well (5) Keep up a good liquidity condition keeping in mind that its only gonna get worse (6) Implement Hybrid/Alternative powertrain strategy on mid-size segment and not just on 'Guzzlers' (7) Whatever you do, just dont cut that dividend to save on liquidity. If that happens then Stock will free fall. I think GM have great potential and its definately worth the risk at 10$. If everything goes GM way you can see a very large profit. But dont look for any short-term gain.

Cesar Villalobos

July 3, 2008 12:43 PM

First of all, Wagoneer must go. He has managed to stay in power (not control) for too long. clearly his plan and his reliance on Lutz (a big engine, bigger car kind of guy) has GM offering moslty what no consumer wants right now.

Then, sell the european cars in america. have them built cheap in the US, or even cheaper in Mexico.

Carl J.

July 3, 2008 1:41 PM

GM made the huge mistake of creating a "typical GM customer" that likes to drive around in 8,000 pound Suburbans, Yukons and Escalades. That's the market and type of customer GM decided to go after. Now, GM is going to pay gigantic price for courting this "yahoo monster truck" crowd. GM made their own bed. Good luck!

DRG

July 3, 2008 1:42 PM

GM needs to fire all the top management, Dump Pontiac,Buick,Saturn,and GMC. Keep Cadillac, Chevrolet, Saab. Either make all trucks under Chevrolet or the GMC brand but not both. Bring some of their European brand designs over here and build them in the USA. Come out with more sports wagons like the Saab 93 and put a Chevy nameplate on it. The Saturn Sky should really be under a Chevy brand name. The key to becoming great again is to be a lean / mean company and trim off all the FAT. Otherwise GM will go the way the US Steel industry did BK.

Howard

July 3, 2008 4:17 PM

GM is so screwed up that I wax nostalgic for the old Dinah Shore commercials "see the USA in your Chevrolet". Unfortunately GM has spent most of the last 35 or so years missing the mark. They did have a co-conspirator with the UAW, but most of the blame falls on their shoulders. RIP.

ballbuster

July 5, 2008 5:44 AM

Wagoner: Hey, Lutz,Wellburn, and Fritz...let's sing a song together?
Lutz: what's up?
Wellburn: What's the tune?
Friz: I'm game!
Wagoner: let's sing this lyric to the tune of a Chorus Line song:

Kiss today good-bye, and point me toward tomorrow,... we did what we had to do,... no we can't regret what we screw ourselves for,....what we screw GM for......
Money,... money is almost gone, as we travel on,... money is all we remember...
Kiss our jobs good-bye,... and point us toward unemployment...we all deserve what we cause,....no we can't forget what we screw GM for..... what we screw all for....

Wagoner: Let's sing! on chore, boys!

Chris

July 7, 2008 10:37 PM

It is a terrible time to be in Detroit... It is a sad reality when GM is the best of the 'big' Three in terms of seeing the reality of their situation (the real shock will be when the Chinese auto makers dissable factories and ship them back to the homeland - look no further than MG/Rover).

GM should parcel off their offshore operations, open up minority stakes to local operators to get money to last the crunch from the home office in the US. Their offshore subsidaries cant get the money back into the country... but will feed their local piplines while the US operations go into Chapter 11.

North American operations should should cut to Caddie and Chevy. Let the courts make the concessions that the brass in the Ren Cen and the UAW are incapable of. The GM brass is fighting like hell to keep their jobs, and the UAW has no ability to see over the horizon and keeps asking for the impossible.

It is a bad time to be a domestic dealer in Detroit. Hope their last 10 years of minting money has allowed the principles to hedge for the next 6 years of flat line. In a few years with a depressed dollar, totally new workforce, little legacy costs and an honest attempt to create a long term and R&D focused team... a new American car company can reassemble the offshore operations, a la At&T...

There will be a General Motors in the future... will it be a Westinghouse (now a Japanese property) or a GE? Only time will tell, God Speed and Good Luck!

Patrick Costello

July 8, 2008 1:43 PM

What is amazing and very disappointing is that no one, not only in GM management, but Ford and Chrysler, paid any attention to history. Did they not remember what happened in the 70,s when all they had was gas guzzerlers and Japan had economic cars. In the 80,s they made decent, smaller, and economical cars, but they lobbied Congress for the the huge loop hole on the C.A.F.E.standards. Sadly everyone else pays the price but the top executives. Where were the managers of mutual and pension funds? Why have they not been challenging the CEO's about their decisions? We, who have money in these funds, or direct stock ownership, have been asleep at the switch for allowing the boards to be a "good old boy" network. History should be a requirement for anyone getting a bachelors degree regardless of the field of study. History should come before any other study.

ROSE

July 30, 2008 11:09 PM

GM DOES NOT FIX THERE RECALLS..4 TIMES MY CAR HAS BEEN THERE FOR THE SAME PROBLEM A RECALL STILL NOT DONE. 2000 CHEVY CORVVET 34,000 I SPENT AND NOW THEY WANT TO HARGE ME..KELLEY CHEVORLEY ARE THE BIGGEST THIEVES OUT THERE..
THEY HAVE TRIED TO DO MY RECALL 4 TIMES AND STILL IS NOT RIGHT. THEY CHARGED ME 1200 DOLLARS AND THATS NOT RIGHT. IT WAS THERE PROBLEM WHEN THEY MADE THIS CAR WITH THE SCREW UP. AND OF COURSE THEY ALL TRY TO PASS THE BUCK. AS MUH AS I LIKE CORVETES I WILL NEVER BUY ANOTHER ONE....

home owners insurance

January 29, 2011 7:44 AM

Have you considered adding some social bookmarking links to these blogs. At the very least for youtube.

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Want the straight scoop on the auto industry? Our man in Detroit David Welch, brings keen observations and provocative perspective on the auto business.

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