Wednesday, December 21, 2005

Fixing a Hole at GM

Pressure grew on General Motors Corp., with its shares falling to a 23-year low yesterday as rival Toyota Motor Corp. said it would boost production, potentially surpassing GM as the world’s biggest auto maker.—Wall Street Journal.

In the wake of GM CEO Rick Waggoner’s Wall Street Journal op-ed self-defense a few weeks back (described in “General McClellan Awaits Battle…In Detroit”), we now find financier and GM shareholder activist Kirk Kerkorian selling GM stock—12 million shares worth—for tax purposes.

Kerkorian simultaneously annoyed the Feds and spooked investors betting on a Kerkorian-led turnaround of what has been “the world’s biggest auto maker” that perhaps Kerkorian's knees are buckling. Most likely, they are not.

But this fascination with being the “world’s biggest auto maker”—what’s the point? Frequently in today’s Journal article the wordsmiths revert to that sort of language to describe the beleaguered company:

GM, still the world’s largest manufacturer, remains a colossus, with more than $190 billion in annual revenue and 325,000 employees worldwide…

If being “a colossus” matters, however, why is General Motor’s market capitalization less than the $19 billion of cash the company’s automotive business had on hand at the end of last quarter?

In fact, it does not matter.

Perhaps it mattered in the 1960s—the glory years of American manufacturing and the apotheosis of “Man in the Grey Flannel Suit,” when “Made in Japan” held the same derogatory connotation that some now associate with cars made in Detroit.

But it does not matter today, when GM is fighting for its life on many fronts—trying, simultaneously, to lower its cost structure, raise quality, reduce its dependence on trucks and SUVS by introducing fuel-efficient models—and all the while avoiding bankruptcy.

When the Beatles’ uninterrupted string of Number One hits (starting with “She Loves You”) was bizarrely interrupted by the failure of the "Penny Lane"/"Strawberry Fields" single to outsell the reigning Number One, Ringo said it was the best thing that could have happened: it took all the pressure off.

The band went on to do their best work—the White Album—and take their place in history.

("Penny Lane"/"Strawberry Fields" was held to Number Two by an entirely forgettable Number One song. Whoever identifies that song honestly, no Googling allowed, will be rewarded with nothing but their name on this blog.)

Far be it for me to prescribe a solution to the list of GM’s woes. But I suggest they stop worrying about staying “Number One.”

Get over it, already, and move on. The risk to GM, in my opinion, is not losing a few points of unprofitable market share to Toyota: the risk is becoming the Number One Chapter 11 filing in history.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


cdub said...

Rick should read the WSJ interview with Southwest's Gary Kelly, who repeatedly emphasized that profits - not size - are what counts.

Oldnative said...

Jeff - Never, ever underestimate the corporate/personal ego and the ability to make irrational decisions based upon retaining or achieving the #1 postion in some category.

dj kan said...

Engelbert Humperdinck - "Please Release Me"


-the frank sinatra of finance

p.s. i googled it

rbkswm said...

size matters if you're in the porn industry....

Barry Ritholtz said...

I finally caught you "making this up:"

'The band went on to do their best work—the White Album.'

The White Album is a terrific tho somewhat flawed work. The 17 songs on Record 1 are as good as anything thats ever been committed to vinyl; unfortunately, disc 2 fails to live up to the same quality.

Actually, the debate should really be whether Abbey Road surpasses Sergeant Pepper as their finest work!

Ok, so maybe you weren't making it up -- I do love the White Album, and any difference of opinion is an arguable point -- but its the closest I've ever caught you coming to making something up!

Aaron Koral said...

Hi Jeff - sadly, I must disagree with your view on GM. Yes, their problems are legion - health care, pension under funding, sagging auto sales, the list is endless.

Think about this, though - you mentioned that GM's market cap is less than the cash on its balance sheet. That's a plus, in my book.

GM could continue to build the cash on its balance sheet by selling off its stake in GMAC. I'm sure a likely buyer would "come a courting" (hello, UBS) to get their toehold on GMAC's assets.

GM could then start using cash to buy back the stock in the open market, giving investors a signal that its shares are "undervalued" on an asset conversion basis. It could also use the cash to fund its pension liabilities, shoring up the balance sheet even further.

I would think that unions are in such a weak state of bargaining power these days that they have no choice but to cave in and provide some "give backs" in terms of health benefits for retirees. I would be very surprised if the UAW engages in a showdown with GM to bankrupt the "hand that feeds them" - it's just not favorable for their member's interests, IMHO.

Then, think about this - Buick (yes, Tiger Woods' nameplate of choice) has quite a stronghold in China. Sales of Buicks in China are robust. China offers an untapped market for other GM nameplates, even if they are competing against the likes of Toyota and other local based nameplates.

I don't know about you, but I like a lot about GM - GM is a stock that is capable of a "turn-around" much like Chrysler was back in the 1980's. The $64,000 question, however, is this: Is Rick Waggoner "the man" to put GM back on track? I think he is, but we'll have to wait and see what happens in 2006 (I could be VERY wrong on this call, though).

Merry Christmas...

rgd152 said...

All the talk about how much cash GM has misses the point. What does having $10b or $20b in cash do for you when you have $50b+ in liabilities not recorded on your balance sheet. Not a hell of a lot I would suggest. All $10 - 20b in cash does for you is buy you time, time in which you hopefully dig your way out of a hole.

As for selling off GMAC I would not be surprised if it is a whole lot more problematic than people realize. GM will be able to sell off the non auto finance parts of the GMAC biz and they have started that process but that is a side show as the majority of the value is in the auto business. Interesting thing is that no one commentating on this process seems to have spent any time going through GMACs accounts (yep they file separate accounts) as if they did what you would discover is that GM paid GMAC nearly $2b in credit support, rebates, etc last year and received $1.5b in dividends. Hmmmm so if you were a buyer of GMAC you would still be depending on the creditworthiness of GM's auto operations. Not the type of risk I would be interested in at 1x book but I guess I am a conservative guy. And we have not even investigated what the Pension Benefit Gtee Board would make GM do with the cash realized from the sale.

I am hard pressed to see how GM avoids ch11 other than having the govt take on all their pension and healthcare liabilities . . . . which is some of the murrmurrings we are starting to hear coming out of Detriot, which my guess is will get louder and louder over the next 6 mths.

Its_strange said...

GM , Ford equal NYTimes and The Washington Post , etc ...? Things certainly will look different .

IMHO said...

GM discontinued their match for the 401K, which was made in GM stock.

Also, the employee contribution is no longer mandated to be in GM stock (50%) and held for a year.

This begins in 2006.

Is there any way this can be intrepretted positively?

Steve said...

The White Album? Pleeease. With all due respect, I think that was a mediocre album that sounded like individual songwriters with a backup band. The best Beatle album is, unquestionably, Revolver with Rubber Soul as a close second.

Jeff Matthews said...

Barry: I'll agree with you--Abbey Road is a better album than Sgt. Pepper's. But I was not making it up regarding the White Album.

Steve: The White Album was indeed made by a set of individual songwriters using the rest as their backup band. But Dear Prudence? USSR? Warm Gun? So Tired? Guiter Gently Weeps? Yer Blues? Me and My Monkey? Helter Skelter? Revolution (#1, not #9)?

Put them all together and I think it beats Revolver or Rubber Soul hands down.

This has the makings of another blog...

BDG123 said...

GM is close to a screaming buy or ready to go bankrupt. It's close to a screaming buy because the sun, moon and stars have finally aligned to get this p*ss poor management succession of the last thiry years OUT, fix the labor mess and get down to making vehicles GM is capable of making.

It's likely closer to bankruptcy first. The Fed's tightenings over the last twenty years have a tendecy towards crisis rather than sucking the liquidity out of the bag. Highest probability on the horizon is GM while people babble about the global real estate bust. Keep your eye on the ball as the coach always said. Explains the long bond appetite and a few other oddities in the system as well as a cratering stock price chalked up to Kerkorian's tax sale. Yeah, I believe that's the reason for the cratering beyond its normal cratering. GM's cash on hand isn't so much as people believe. This is a massive company with massive capital requirements. Market cap - $11 billion. Debt - $300 billion. They likely need $12-14 billion on hand at the time they enter bankruptcy.

Another few crappy quarters, management snafus and a few dirty skeletons in the closet (GMAC holding any asset backed securities?) and you've got your financial crisis.

A mess indeed.

rtruxel said...

If the status quos continues GM cannot stay in business and meet it's obligations. They can stay in business if they do not meet their obligations, but they cannot meet their obligations if they go out of business. Some options being discussed:
CH 11 - This will essentially allow the company to stay in business without meeting it's obligations.
Government Bailout / take over obligations. If GM received some amount of "free" money $5-10 billion?, or was freed from it's existing obligations, they could survive and meet future bligations.
Raise capital - If GM sold new shares in whatever quantity at whatever price this would have the same effect on the company and it's creditors as a bailout.

GM has a market cap of $11 billion. If they take in additional capital, from equity sales or free money, their market cap will certainly rise (though maybe not on a dollar for dollar basis.) This means that share prices my fall, but should not fall significantly.
So why isn't GM issuing new shares of common stock to raise capital / pay off debt? Can / should they be forced to do so?
For one thing, they are holding out for a bailout.
For another, they can always get bankruptcy protection.
What if their was no chance of a bailout for the company or the pension, and no possibility of chapter 11, only chapter 7?

The pension fund, unions, and creditors would demand the sale of equity to raise capital, and stockholders would prefer this to bankruptcy.