Leaner GM rises from ashes
July 13, 2009
By Kevin Krolicki and David Bailey Detroit
A new General Motors (GM) emerged from bankruptcy protection on Friday - far quicker than most industry watchers expected - as a leaner firm pledging to win back US consumers and pay back taxpayers.
A whirlwind 40-day bankruptcy for GM concluded with the closing of a deal that sold key operations to a new company majority-owned by the US Treasury.
The development, which follows a similar re-organisation of Chrysler, represented a victory for President Barrack Obama's administration and its commitment to save jobs and avoid a liquidation of the largest US car maker.
At the same time, the US government has taken on substantial new risks as a 60 percent owner of the new GM with a $50-billion (R414bn) equity investment and $10bn in debt and perpetual preferred shares.
Analysts said the intervention gave GM a new chance and sharply lower operating costs, but left management facing deep challenges given the weak economy and GM's long slide in market share.
"I wouldn't really call it a new GM, it is just a smaller GM," said Mirko Mikelic, a portfolio manager at Fifth Third Bank. "That would be more of an apt description. They still have a lot of hurdles to jump. Right now, they are in a survival mode."
Chief executive Fritz Henderson said the new company would shed layers of management, make decisions faster and shed the bureaucracy that critics say contributed to the failure of the 100-year-old firm.
"The bottom line is that business as usual - and as we have had it until today - is over," he said. "Everyone associated with GM must be prepared to change - and fast."
The white-collar work force will shrink more than 20 percent by cutting 6 000 jobs. Executive ranks will be cut 35 percent.
Bankruptcy slashed GM's debt and health care obligations and brought down labour costs to be on par with Japan.
The new GM will have slashed its debt and health care obligations by $48bn, dropped almost 40 percent of the dealers from an unprofitable network and moved to sell laggard brands such as Saab, Saturn and Hummer.
Analysts said that gave GM a chance to deliver more fuel-efficient cars and to focus its resources on fewer brands, models and dealerships.
"The challenge in the future is how to approach a marketplace that has been burned by GM," said Pete Hastings, an analyst at Morgan Keegan.
While key assets and the Chevrolet, Cadillac, Buick and GMC brands were sold out of bankruptcy to form the new company, other assets remain in bankruptcy for liquidation. That old GM, to become Motors Liquidation, is expected to stay in bankruptcy for years.
Bondholders, who were owed $27bn, could eventually get a 10 percent stake in the new GM. The US Treasury will own 60.8 percent and 11.7 percent will be owned by the governments of Canada and Ontario. A retiree trust fund affiliated with the United Auto Workers union will hold 17.5 percent.
GM would start to pay back the US Treasury as soon as possible, said chief financial officer Ray Young. GM planned an initial public offering as soon as next year and could use some of the proceeds to repay government debt, Young said.
Henderson said the company would be run by a single executive committee, cutting the number of top decision makers in half. - Reuters
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