Bankruptcy: An option for GM?

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Bankruptcy: An option for GM?

Some analysts say it could help the world's largest automaker shave costs; others say not so fast.

June 8, 2005: 2:57 PM EDT
By Chris Isidore, CNN/Money senior writer


NEW YORK (CNN/Money) - General Motors Corp. might be one of the richest troubled companies in history.

The world's largest automaker had $52.6 billion in cash and marketable securities on its balance sheet at the end of the first quarter, even as it was reporting a $1.1 billion net loss. While that cash balance is down about $1 billion from the beginning of the quarter, it's up about $3 billion from where it was a year ago.

In an era of troubled pension plans, its plans are overfunded.

Its finance unit, GMAC, made $729 million in the first quarter. And even though GMAC's debt was cut to junk bond status along with the rest of the company, the finance unit has adequate access to capital to keep posting strong profits going forward, GM Chairman and CEO Rick Wagoner told shareholders Tuesday.

But GM has serious enough problems that its executives won't even project when it might return to profitability. The downgrade to junk bond status is a warning sign. Another is that its stock market worth is below $19 billion, well below its cash on hand.

So all of these problems and positives lead to the question: Just how sick is the patient?

Plenty sick, according to some experts.

"If you look at the cash on hand and the market value of the stock, it means that investors' view of the company is that it has no value if you take out the cash," said University of Maryland business professor Peter Morici.

The problem is that the company's key product -- its sport/utility vehicles -- are seeing declining demand that has forced the company to step up the cash-back offers needed to maintain sales, said Walter McManus, director of the Office for the Study of Automotive Transportation.

That shouldn't have been a surprise, given rising gasoline prices. But GM hasn't responded well to market change. Instead it's tried to keep sales strong through ever-increasing incentives.

"It's very unusual for a high-cost producer to lead a price war," said McManus.

The company is in talks with the United Auto Workers union over its health care costs, which Wagoner said cost GM an average of $1,500 more per vehicle than the health care costs of overseas competitors, even on cars and trucks made at the Japanese automakers' U.S. plants.

But McManus said the UAW isn't likely to agree to any change that requires it to reopen the contract that runs through 2007, even though Wagoner told shareholders Tuesday that there's no way the company can wait for relief from soaring health care costs.

McManus said union leaders probably can grant some limited relief through changes in benefit plans offered to active employees and retirees. But that probably won't be enough.

"Hard to see where you can make a change that will save as much as they need to save," said McManus.

The union isn't commenting on Wagoner's comments to shareholders or on the talks over health care costs.

Morici said the best alternative could be to file for bankruptcy protection, and try to have a judge force health care savings and other cutbacks on the UAW. Another alternative is that only the auto operations file for bankruptcy, thus preserving the corporation's finance unit and other assets, like its horde of cash.

"The rating agencies and stock market are sending a clear message that the company will lose money for the foreseeable future and eventually go bankrupt," said Morici. "Bankruptcy is a serious option either strategically or as an eventuality."

But McManus said there are risks for GM if it tries to use bankruptcy to win concessions, and some other analysts said they don't think bankruptcy will happen.

"I don't think it gets them out of their obligations," said Michael Ward, auto analyst for Soleil Securities. "They have to find solutions and I do not believe bankruptcy is an option." He said he's more optimistic than others that the UAW will grant GM much of the savings it needs.

"I don't think they're unreasonable," he said about union leadership. "I think they understand the auto business better than the capital markets give them credit for."

Wagoner dodged the question of whether bankruptcy is an option that the company is considering in his prepared remarks Tuesday.

"What happens if we can't reach agreement with the UAW on this matter promptly? Well, I don't believe that it serves a useful purpose to speculate on that," he said. "Let me just emphasize that our very strongly preferred approach is to do this in cooperation with the UAW, because we're convinced that is the best way for our employees, our stockholders, all our constituents."