Lifestyle

Can Wagoner Outlast GM's Loss?


GM seems to be so used to bad news that not even a $39 billion hit can loosen CEO Rick Wagoner's grip on the company. Here's why

Over the past few weeks, two major Wall Street firms announced huge losses and in a matter of days, their CEOs were shown the door.

General Motors (GM) announced an even larger net loss of almost $40 billion on Nov. 7, but don't expect Richard "Rick" Wagoner to follow Merrill Lynch's (MER) Stanley O'Neal and Citigroup's (C) Charles Prince on the next private jet out of town just yet.

Wagoner, who for several years has been attempting to turn around GM, has had some notable successes in 2007. He was able to off-load billions of dollars in liabilities to an independent retiree health-care trust as part of the new contract with the United Auto Workers. He introduced popular new models such as the Buick Enclave (BusinessWeek.com, 8/24/07) and Saturn Aura (BusinessWeek.com, 10/4/06), and he stemmed market share declines over the last few months. But given such dismal earnings news and the fact that both Prince and O'Neal were so quickly bounced, it's remarkable how muted the initial reaction was to Wagoner's latest announcement.

Accrued Loyalty

"While we continue to advise taking any profits in the shares, I think the truth is that [GM] management is doing their best to play the hand they've been dealt," said Peter Nesvold, auto industry analyst for Bear, Stearns (BSC) in New York.

Wagoner is fortunate in that he commands the loyalty of many of his employees as well as that of his board of directors. Remember, it was only last year that he successfully beat back billionaire investor Kirk Kerkorian's proxy fight to force a link-up with Carlos Ghosn and Renault-Nissan (NSANY).

The biggest part of GM's nearly $40 billion loss came from writing off the value of $38.6 billion worth of deferred tax assets. Year-to-date after nine months, GM suffered a net loss of $38 billion, vs. a net loss of $2.9 billion in the year-ago period. The company also had a less spectacular, but still disappointing, loss of $1.6 billion from third-quarter continuing operations. That compares with a year-ago quarterly profit of about $500 million.

A Gamble Gone Wrong

Through October, GM's U.S. sales were down 5.7%, to about 3.2 million units, even though its U.S. market share improved over the year-ago month for the fourth month in a row. "While we're pleased with our [market] share performance during recent months, the economic pace and the market are certainly below our expectations, and certainly something we need to be cognizant of," said Frederick "Fritz" Henderson, GM vice-chairman and chief financial officer.

The nearly $39 billion in deferred tax assets was meant to serve as losses for tax purposes, to be used to offset profits that GM now says are unlikely to materialize. In short: GM bet wrong. Without the expected profits, the stockpiled deferred tax assets were worthless. If GM's profit picture turns around, some of the deferred tax assets could be brought back into play.

In addition to the automotive losses, the subprime mortgage meltdown hurt GM's minority stake in GMAC Financial Services worse than GM expected, Henderson said. GM's 49% share of GMAC represented a net loss of $757 million for the quarter vs. a profit of $522 million a year earlier.

What made GM take such a drastic action?

"We Didn't See Housing"

Fundamentally, U.S. auto sales are not living up to GM's expectations, said Henderson in a conference call for analysts, investors, and reporters. He said that when GM's current restructuring plans were made in 2005, GM expected the auto industry to run at a seasonally adjusted annual selling rate of about 17 million U.S. cars and trucks. The SAAR for October and for the few preceding months has been closer to 16 million, and the outlook for 2008 is similar, Henderson said.

"We expect that to continue. That [SAAR] is not a terrible number. We're not signaling that it's worsening or anything, but today it's certainly below trend," admitted Henderson. The "trend" line attempts to predict auto sales based on historical performance.

Central to GM's poor performance from continuing operations is the fact that GM continues to lose money on its core North American automotive operations, which lost $247 million in the third quarter. That was an improvement over the $660 million loss from the year-ago quarter.

"It certainly is not acceptable. Even if we were on the right side of the red, it would still not be adequate," Henderson said. Summing up GM's reversals, Henderson acknowledged, "We certainly did not see a 16 million market at the time, and we didn't see housing." GM's share price ended down more than 6%, to 33.95 at the close of trading on Nov. 7.

GM Can't Afford More Bad News

Rival Ford Motor (F) followed up GM's bombshell with news that was at least less-bad, if not exactly good: Ford on Nov. 8 reported a third-quarter net loss of $380 million. That was better than the $1 billion loss from continuing operations that analysts had expected, and an improvement over a year-ago loss from continuing operations of about $1 billion.

Through 10 months of 2007, Ford's U.S. sales were down 13% compared with the year-ago period. At fewer than 2.2 million cars and light trucks, Ford sales were slightly behind those of Toyota (TM), which means Ford could finish 2007 as No. 3 in U.S. auto sales for the first time for a full year, behind GM at No. 1 and Toyota at No.2.

But even in the famously clubby automotive business, a loyal board and employees may not be enough for Wagoner if the fourth quarter reveals any more nasty surprises. GM and its shareholders can't afford it.


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