Tom Donlan Talks Sense on GM

As someone suffering with General Motors since 2005, Thomas Donlan's editorial in Barron's certainly catches my attention.

You know I've switched from holding GM common stock to a class of convertible bonds. And if you're a longer term reader of this blog, you've read me repeatedly point out that GM's future is really outside North America.

From Donlan's editorial:

An easier way to make GM stock go up would be to spin off the company's North American operations and put that part of the business into bankruptcy. Other divisions, in China, Britain and Germany, could stand on their own.

The new GM would be a transnational company, while it's likely that some of the best U.S. assets would be purchased by foreign car companies. No bad thing: New owners should improve management and labor relations.

What stands in the way is the U.S. government. The Treasury Department has created a Bailout Economy, in which nobody -- not bankers, not manufacturers, not corner bakeries -- wants to make a move that might foreclose the chance of receiving government cash and saving union jobs.

Failure might well be the best option for GM, but not when a bailout is available.

I'll only add that one reason GM would rather not declare bankruptcy, even for a North America-only spin off, is the havoc it would cause for dealers. But that's small potatoes compared to what the government's bailout mania means for taxpayers.

Comments

[Sivaram Velauthapillai]

I don't see how GM can split the company without running into issues with debtholders, employees, dealers, and various other commitments that take precedence over shareholders. This will especially be difficult given that the proposal entails one company owning questionable assets and high liabilities. It's as bad as if the monoline bond insurers split off the toxic insured assets from the safe ones. Just ain't happening.

Every single time GM wanted to get rid of some division--Delphi and GMAC for example--it barely resolved any of the liability issues. It either ended up owning a lot of the obligations (worker obligations in Delphi case) or had to inject a lot of capital (in the case of GMAC to some degree.)

People like to bash the unions but the key problem with GM is management. I'm not a shareholder and don't have any interest one way or another but, I really wonder what the Chrysler merger is going to accomplish. Unless they can get US government to provide a lot of money, the Chrysler deal looks like another short-sighted attempt by management to solve a problem it doesn't have. The Chrysler merger is expected cost more than 100,000 jobs and massive closure of dealerships, among other items, and how is GM going to accomplish that without getting stuck in courts for the next 10 years?

[John]

Sivaram: I'm not a lawyer and don't know. I think the US car companies would have been okay in the face of a normal downturn. But apparently the current crisis is much worse and threatens them all. If the UAW is convinced that all three (or two of three) could go bust, they might swallow hard and make concessions and not fight it. (The UAW has already made concessions to GM over the recent past.) The easiest way for management to rid themselves of the UAW is filing bankruptcy.

I agree the problem with GM since WWII has been management. Mainly being accounting types and not car types, and also caving in on some terrible labor deals. I'm someone who thinks unions are the result of bad management. And, while I'm no fan of the UAW, the responsibility for tolerating excessive worker absentee rates in years past, etc., was ultimately the responsibility of management.

That said, GM's current management has been saddled with lots of stuff not of its making.