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GM's Dwindling Options


After five months of seeking buyers, General Motors (GM) may yet get a deal with someone to sell a big chunk of its GMAC finance arm. Cerberus Capital Management is looking along with some Japanese banks. Leveraged buyout firm Kohlberg Kravis Roberts also has been kicking GMAC's tires for months, investment bankers say.

What does it all mean? Well, it's a clear desperation move for GM. The auto giant needs cash as it tries to restructure, bail out its old Delphi parts unit, and just generally dig in against the gravitational pull coming from U.S. bankruptcy court. Plus, GMAC needs a partner with a strong credit rating so the lender can borrow money cheaply and make a better profit on its loans.

GMAC'S IMPORTANCE. But there's something much bigger going on here. If and when GM pulls off a deal to strip out half of GMAC -- either by selling 51% of the equity or just carving out the insurance and mortgage operations -- it will get upwards of $13 billion in cash. But the company will be down to its threadbare duds as far assets it can sell. And its managers won't be able to rely on lending profits to carry the company as heavily as it has for years, even before the GM's disastrous 2005, when it lost $8.6 billion (see BW Online, 3/14/06, "GM and Ford: Timelines for Turnaround").

In other words, GM will finally have to fix its auto business. For years, GM has been able to rely on income from GMAC to prop up profits and its cash reserves. The company also has been raising cash by steadily selling off assets like its former computer systems group EDS, Hughes Electronics, and even small locomotive and defense businesses. Just in the past few quarters, GM has raised almost $3 billion by selling stakes in Japanese auto makers Suzuki Motors and Fuji Heavy Industries. (see BW Online, 3/7/06, "GM: Cashing in on Suzuki").

IGNORING OBVIOUS PROBLEMS. Cash and income from those operations enabled GM to put off its day of reckoning. From 2001 on, GM laid out billions in ever-higher rebates and made plenty of low-margin deals with rental-car agencies to keep sales going, rather than cutting jobs and plants in a play to chase more-profitable retail sales.

All of these were poor long-term business decisions. Its brands became watered down, reducing their appeal. As names like Pontiac, Buick, and now-defunct Oldsmobile lost respect, they needed more rebates to keep sales up.

But as long as GM could rely on profits from GMAC and cash from sales of other businesses, the company never got near the brink. It never really had to take a hard look in the mirror and overhaul its antiquated and obsolete business model.

FRESH MODELS. In any given quarter, GMAC accounted for 60% to 90% of GM's earnings. Consider this: GMAC made $2.2 billion last year. If GM only owned half of that business last year, its losses would have been closer to $10 billion. Even in profitable years, GM would have been close to break even without GMAC

But once the GMAC sale is done, half the cash and earnings will go to the buyer. That means GM will have to make money -- real money -- building and selling cars. The company will have to drive profits up and down the lineup, not just from its trucks and SUVs. Wagoner's crew will have to resurrect its tarnished brands with a respected, high-volume car, not just a few stylish roadsters.

If GM's new models and the cuts Wagoner has already announced don't bring the company back in a hurry, GM will be forced to radically overhaul the 100-year-old auto giant. It could mean more job cuts and some life-changing concessions from the United Auto Workers union. It may also mean paying off dealers, so GM can get rid of weak brands that drain cash and executive time with minimal return (see BW Online, 3/6/06, "The Other Club Battering GM").

The good news is that a GMAC sale frees up plenty of cash to do it. The bad news is that this is GM's last chance to really control its destiny.


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