What to do with GM

Well it’s been quite a week of activity for GM. Many events have led to the what has finally happened this week. On Monday they filed for bankruptcy. In past few months, GM has received over 19 billion dollars in government loans to continue operating while it came up with a re-organization plan. Their first restructuring plan was rejected by the government. As part of rejecting this plan, the government told Rick Wagnor, the long time CEO of GM, that he must resign.

This week GM also sold its Saturn brand to the Penske Automotive Group and sold the Hummer brand to a Chinese manufacturing company. GM has also gotten its unsecured bond holders to agree to an equity share in the new company in exchange for debt forgiveness. Rounding out the shedding of GM brands is Opel which was sold to the Canadian auto parts company, Magna.

GM also took steps to reduce its legacy costs. In its deal reached with the United Auto Workers union, GM was able to get the union to agree to taking on 10 billion dollars in equity in the union healthcare benefit fund. In exchange for this, the UAW’s healthcare fund will receive a 17.5% equity stake in the new company.

Finally, GM was able to secure bankruptcy up to 30 billion dollars in financing from the government. It’s not like this wasn’t a given, considering the U.S. government will control 60% of the new GM making it the majority owner.

For those who say the GM bankruptcy filing was a product of the economic crisis that started in real estate, I say think again. In 2005, BusinessWeek ran an article analyzing GM’s business plan. Here’s what BusinessWeek predicted:

How bad could it get? BusinessWeek’s analysis is that within five years GM must become a much smaller company, with fewer brands, fewer models, and
reduced legacy costs. It’s undeniable that getting to that point will require a drastically different course from the one Wagoner has laid out so far. He is going
to have to force a radical restructuring on his workers and the rest of the entrenched GM system, or have it forced on him by outsiders or a bankruptcy
court. The only question is whether that reckoning comes in the next year, if models developed by Vice-Chairman Robert A. Lutz fall flat; in 2007, when the
union contract comes up for negotiation; or perhaps in five years, when GM may have burned through its substantial cash cushion.”

It’s now about 5 years later and GM is finally shedding brands, closing factories, and reducing costs. There has been a lot of other analysis done on why GM has failed. This is one article I highly recommend reading which takes a look at the decisions that GM made decades ago to pay for employee healthcare and pensions and how accounting changes in 1992 affected the company.

Make no mistake about this, GM’s failure is a result of poor management decisions.

Now that the U.S. tax payers are the new majority shareholders of GM, we have a chance to have a say in the way GM operates. I propose to the Obama Administration that not only should the current Board of Directors be replaced for violating their fiduciary responsibility to manage the company, but the top 3 layers of management at GM be shown the door. Too often have these same people been granted the authority to manage the company and change the direction of the company only to make poor decisions. It is time to get new blood in the highest levels of GM management and run the company appropriately. Apologists may say that this time will be different in that GM will be smaller, have less legacy costs, and that the decisions will be easier for management to make. I disagree. Top management has had their chance for decades to make GM work. We’re here today because of poor management decisions, nothing more, nothing less.

Feel free to leave your solution and suggestions for GM in the comments especially since the U.S. tax payer is financing GM’s bankruptcy and the new majority shareholder!

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Tags: Finance, news, perspective

This entry was posted on Saturday, June 6th, 2009 at 8:39 pm and is filed under News and Perspective. You can follow any responses to this entry through the RSS 2.0 feed.