GM Files for Bankruptcy

GM's Chapter 11 filing caps a decades-long slide, but it should emerge relatively quickly from court with lower labor and debt costs

By David Welch

A once proud and dominant General Motors, which at its peak controlled half the American auto market, filed for bankruptcy court protection on June 1 in an historic act that will see federal taxpayers own 60% of a smaller, reorganized company.

After decades of decline, GM (GM) was finally brought to its knees by the recession and frozen credit markets, forcing the company into the arms of the federal government. But the money the government gave to keep GM upright—$19.4 billion to date and as much as $30.1 billion more down the line—came with big strings. President Barack Obama wanted GM to completely restructure so it could become competitive again. The only way to get the savings the carmaker needed from bondholders and its sprawling dealer network was under the umbrella of court supervision.

With the bankruptcy, GM will get a chance at a new start. Management and its government overseers hope GM can wipe away decades of outsized retiree and labor costs and brand-and-marketing strategy, both of which were designed for an era that had long passed. The result will be a much smaller GM, one that won't even challenge Toyota (TM) for the crown of world's biggest car company. But with far less debt and a reworked labor contract that will get costs closer to foreign-owned auto plants in the U.S., the new GM has a shot at regaining profitability and becoming competitive again. Legendary GM Chairman Alfred Sloan's strategy of selling a "car for every purse and purpose" will still be in place, but the models will be sold through four focused brands—Chevrolet, GMC, Buick, and Cadillac—instead of eight.

The plan is to have the new GM emerge from court protection relatively quickly, perhaps within 60 to 90 days. Meanwhile, some of the weak brands—Hummer, Saab, Saturn, and Pontiac—plus any unwanted assets, such as factories, would stay with the old company, which would be liquidated. All of those brands are already for sale, except for Pontiac, which will be shut down.

Everyone's Banking on a Turnaround

The federal government will hold 60% of the new company's stock in exchange for forgiving all but $9 billion of the loans it extended. Similarly, the governments of Ontario and Canada will loan GM $9.5 billion and will forgive all but $1.7 billion and keep 12% of the stock in the new company. By the time GM is on its feet, the U.S. government will have loaned it about $50 billion. For the U.S. and Canadian governments to recoup their investments, GM's stock value—all but vanished today, to below $1 billion—would need to eventually be worth about $69 billion. Says the Administration official: "I don't know how much we're going to recover. We hope to recover as much as we can."

Bondholders and the United Auto Workers union are also relying on GM to come roaring back. The union agreed to take 17.5% equity in the new GM, stock warrants for an additional 2.5% of the company, plus $2.5 billion in cash and $6.5 billion in preferred stock that pays a $585 million annual dividend—all in place of the $20 billion GM had pledged to the UAW to start a Voluntary Employee Benefits Assn., or VEBA. That entity, which GM set up in an earlier attempt to offload its massive health-care plan for workers and retirees, will pay medical benefits the way a pension fund pays retiree checks. Bondholders, meanwhile, would take 10% of GM's stock and warrants that could eventually give them an additional 15% of the company in exchange for the $27.2 billion of GM debt they hold.

In another twist, GM will be a private company for 6 to 18 months while it reorganizes, a Treasury official said. Its publicly traded stock has been a component of the Dow Jones industrial index for many years.

GM is also getting a new board.

Business Exchange

Track and share business topics across the Web.