U.S. Bankrolls GM Bankruptcy With $50 Billion Taxpayer Investment

By Don Miller
Associate Editor
Money Morning

General Motors Corp. (NYSE: GM), humbled by competition and battered by a withering recession, filed for Chapter 11 bankruptcy protection yesterday (Monday), where it will tap $50 billion in U.S. government financing to launch itself as a new company.

Once seen as the face of American economic might and industrial technology, 100-year old GM will try to reconfigure itself into a leaner, more profitable business. The company will be forced to lay off 20,000 workers, and close down 11 manufacturing plants.

GM was the world's biggest automaker for 77 years, but the company has lost an aggregate $82 billion over the past four years even as it slashed production capacity, nameplate brands, and more than 100,000 U.S. jobs. The company that once had over 500,000 workers will likely bring its domestic employment down to 72,500 jobs by 2012.

GM plans to rebuild itself around its Chevrolet, GMC, Buick and Cadillac brands, which are seen as successful assets, and are expected to exit bankruptcy in sound financial health within months.  It will close or sell its Pontiac, Hummer, Saturn and Saab holdings, and divest other liabilities in a lengthier court-supervised reorganization.
"Today marks a defining moment in the reinvention of GM," President and Chief Executive Officer Fritz Henderson said in a statement. "The economic crisis has caused enormous disruption in the auto industry."

"It's been a long time coming, but the reality of a GM bankruptcy is still a bitter pill to swallow -- it's a bit like the Titanic sinking," Stephen Pope, chief global strategist at Cantor Fitzgerald in London told Bloomberg News. "This is a step they should have taken more than a year ago, which could have put them in much better shape before the economy went down."

GM's bankruptcy will be the fourth largest in U.S. history and the largest ever by an industrial company, according to Bloomberg. The company has a reported $82.3 billion in assets and $172.8 billion in debt.

The U.S. government plans to bankroll the "new" GM with an additional $30 billion in financing. That brings the government's total investment to roughly $50 billion, which it will convert to a 60% stake in the new company. 

In a last minute change to the bankruptcy plan, Canada agreed to provide $9.5 billion in funding and would get a 12% stake. The United Auto Workers (UAW) union would have 17.5% share of the GM, and bondholders would get a 10% stake. 

GM's stock was removed from the Dow Jones industrial average before U.S. financial markets opened on Monday.  Current shareholders are likely to be wiped out, according to a report in Forbes.

The company filed for bankruptcy on the same day it faced a government deadline to prove it could reorganize out of court by wringing concessions from its bondholders and the United Auto Workers union.

GM was able to reach new agreements with both but fell short of the $44 billion in cuts the government said was needed to survive in its previous form.

The goal of the restructuring is to ensure GM can be profitable if annual U.S. auto sales recover to a level of 10 million units.  GM had previously based its recovery plans on industry-wide sales closer to the 16 million mark, a level last seen in 2007.

The administration's carefully orchestrated plan for GM is for a "quick rinse" sale process where a much smaller company will emerge from court protection in as little as 60 to 90 days.

The groundwork for GM's quick path through bankruptcy was paved by Chrysler LLC, which filed for Chapter 11 protection in April.  That process was given a boost Monday when a judge approved Chrysler's plan to sell the majority of its assets to Italy's Fiat SpA (ADR OTC: FIATY). Chrysler may exit the Chapter 11 process as soon as this week.

Still, even if the streamlined companies emerge from bankruptcy quickly, there are no guarantees for their long-term survival. Overseas competitors are circling the still lucrative U.S auto market with line-ups of fuel-efficient cars that GM and Chrysler may not be able to match.

"Now the hard part begins, which is making GM and Chrysler competitive. If they don't do that, then we'll be doing this all over again in a few years," Christopher Richter, an auto analyst at CLSA Asia-Pacific Markets in Tokyo told Reuters. "The immediate implication is that the companies are going to get smaller and so market share is up for grabs, which means that rivals like Toyota, Honda, Nissan and Hyundai are going to gain share."

News and Related Story Links:

• Bloomberg:
  
  GM Files Bankruptcy to Spin Off More Competitive Firm

• Money Morning:
  Bankrutpcy Will Let General Motors Move Forward
• Forbes:
  Stocks Up On GM Bankruptcy Filing
• Money Morning:
  As GM Cruises Toward Government Deadline, U.S. Automakers Must Learn to Deal With a Permanently Smaller Market
• Reuters: 
  GM files for bankruptcy, Chrysler sale cleared