Professional Documents
Culture Documents
Rarely has a firm fallen as far and as fast as General Motors (GM). Founded in
1908, GM dominated the car industry through the early 1950s with its share of the
U.S. car market reaching 54 percent in 1954. However, this proved to be the firm’s
high water mark. Efforts in the 1980s to cut cost by building brands on common
platforms blurred their distinctiveness. Following increasing healthcare and
pension benefits paid to employees, concessions made to unions in the early 1990s
to pay workers even when their plants were shutdown reduced the ability of the
firm to adjust to changes in the cyclical car market. GM was increasingly burdened
by so-called legacy costs, i.e., healthcare and pension obligations to increasing
large retiree population. Over time, GM’s labor costs soared compared to the
firm’s major competitors. To cover these costs, GM continued to make higher
margin medium to full size cars and trucks, which in the wake of higher gas prices
could only be sold with the help of highly attractive incentive programs. Forced to
support an escalating array of brands, the firm was unable to provide sufficient
marketing funds for any one of its brands.
With the onset of one of the worst global recessions in the post World War II, auto
sales worldwide collapsed by the end of 2008. All auto makers’ sales and cash
flows plummeted. Unlike Ford, GM and Chrysler were unable to satisfy their
financial obligations. The U.S. government, in an unprecedented move, agreed to
lend GM and Chrysler $13 billion and $4 billion, respectively. The intent was to
buy time to develop an appropriate restructuring plan.
Having essentially ruled out liquidation of GM and Chrysler, continued
government financing was contingent on gaining major concessions from all major
stakeholders such as lenders, suppliers, and labor unions. With car sales
continuing to show harrowing double-digit year over year declines during the first
half of 2009, the threat of bankruptcy was used to motivate the disparate parties to
come to an agreement. With available cash running perilously low,
Chrysler entered bankruptcy in early May and GM on June 1st, with the
government providing debtor in possession financing during their time in
bankruptcy. In its bankruptcy filing for its U.S. and Canadian operations only, GM
listed $82.3 billion in assets and $172.8 billion in liabilities. In less than 45 days
each, both GM and Chrysler emerged from government sponsored sales in
bankruptcy court, a feat that many thought impossible.
Judge Robert E. Gerber of the United States Bankruptcy court of New York
approved the sale in view of the absence of alternatives considered more favorable
to the government’s option. GM emerged from the protection of the court on July
10, 2009 in an economic environment characterized by escalating unemployment
and eroding consumer income and confidence.
Even with less debt and liabilities, fewer employees, the elimination of most
“legacy costs,” a reduced number of dealerships and brands, GM found itself
operating in an environment in 2009 in which U.S. vehicle sales totaled an anemic
9.2 million units. This compared to more than 16 million in 2008. GM’s 2009
market share slipped to a post-World War II low of 19 percent. Only the
government’s “cash for clunkers” program during the summer months offered
some respite from the largely unremitting downturn in U.S. auto sales. However,
with the cessation of the program in late August, the boost in sales proved
temporary.
However, time was of the essence. The concern was that consumers would not buy
GM vehicles while the firm was in bankruptcy. Consequently, a strategy in which
GM would be divided into two firms: “old GM” containing the firm unwanted
assets and “new GM” owning the most attractive assets. New GM would then
emerge from bankruptcy in a sale to a new company owned by various stakeholder
groups including the U.S. and Canadian Governments, a union trust fund, and to
bond holders.
GM’s U.S. and Canadian assets and liabilities were split between two companies
under the protection of the bankruptcy court. GM’s exit from Chapter 11 involved
the sale of its most attractive assets to a new company (dubbed the New GM)
owned primarily by the American and Canadian governments and a healthcare
trust for the UAW union. The unattractive assets were transferred to the other
company referred to as the “Old GM.” The old GM which will be known as
Motors Liquidation Company and includes various properties, including facilities
already slated to be closed. Such properties will be sold to the highest bidder under
court supervision. Other assets to be filed under the old GM include the brands
Hummer, Saturn, and Saab for which GM already has buyers.
Total financing provided by the U.S. and Canadian (including the province of
Ontario) governments amounted to $69.5 billion. U.S. taxpayer provided financing
totaled $60 billion consisting of $10 billion in loans and the remainder in equity.
The government decided to contribute $50 billion in the form of equity to reduce
the burden on GM of paying interest and principal on its outstanding debt. Nearly
$20 billion was provided prior to the bankruptcy, $11 billion to finance the firm
during the bankruptcy proceedings, and an additional $19 billion was to be
provided before the end of 2009. In exchange for these funds, the U.S. government
will own 60.8 percent of the new GM’s common shares, while the Canadian and
Ontario governments own 11.7 percent in exchange for their investment of $9.5
billion. The United Auto Workers (UAW) new voluntary employee beneficiary
association (VEBA) received a 17.5 percent stake in exchange for assuming
responsibility for retiree medical and pension obligations. Finally, bondholders and
other unsecured creditors received a 10 percent ownership position. There will be
$2.1 billion in preferred shares held by the Treasury and $6.5 billion in preferred
shares which will be issued to the new VEBA.