Discuss Detroit Archives - Beginning January 2006 How to Save GM Previous Next
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Mrjoshua
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Username: Mrjoshua

Post Number: 632
Registered: 03-2005
Posted From: 69.209.177.197
Posted on Wednesday, January 25, 2006 - 10:18 pm: Edit PostDelete PostMove Post (Moderator/Admin Only)

Union-Made, Union-Owned?
A Plan for GM

January 25, 2006; Page C1
The Wall Street Journal

In the sad decline of the American automotive industry, we have reached the serial restructuring stage.

Every few months Wall Street flirts with hope as Ford Motor or General Motors presents a new plan to cut workers, close plants and rejigger benefits. But the moment is fleeting, as investors revert back to pessimism.

The plant closings and job cuts are unlikely to save the companies, particularly GM, which is in more serious straits than Ford. The two Detroit mainstays could solve their problems by selling better cars, of course. But winning back customers will take years, a luxury GM doesn't have.

How would you save GM? Send questions and comments to longandshort@wsj.com. Selected letters appear online most Mondays.What's needed is a radical solution that breaks the restructuring cycle and saves GM. The United Auto Workers union says a national health-care plan would solve a big chunk of the auto industry's cost problems. But such a solution is highly unlikely in the current political climate.

So here's another idea: Transform GM's workers and retirees into owners in exchange for benefit givebacks. Rod Lache, an analyst for Deutsche Bank, has been mulling over such a plan to save GM. Here's how it would work:

GM had a pension liability of about $90 billion at the end of 2004. Mr. Lache estimates GM has health-care liabilities of about $65 billion.

That's $155 billion in liabilities. The vast amount, but not all, is attributable to hourly, unionized workers.

Now let's look at the assets supporting those obligations. The pension plan had assets of almost $90 billion at the end of 2004. GM says that after investment gains of 13% last year, the plan is overfunded by $6 billion. The health-care obligations are underfunded to the tune of $50 billion. (For the purposes of this exercise, we assume simply that the pension fund is adequately funded. When GM reports 2005 year-end results tomorrow, it will be easier to assign more-accurate numbers to all of these.)

Mr. Lache proposes to give the money that is socked away for pensions and health care to the auto workers. Then, he proposes that GM transfer GMAC, the financing unit, to the workers. GMAC has about $23 billion in book value. Add that to the existing $15 billion long-term health-care trust, which employees then manage. The pension plan becomes an employee-run retirement plan.

OK, that amounts to $128 billion in assets, leaving workers far short of the $155 billion in estimated liabilities. The plan needs a sweetener: Give the workers $20 billion in GM equity. But GM's market value is just $11 billion today. So, how is that possible?

After getting out from under the benefit costs, GM would be a nimbler competitor. And it would throw off plenty of cash. Indeed, Mr. Lache estimates that GM would generate a little less than $13 billion in earnings before interest, taxes, depreciation and amortization a year under his plan.

The market would give the company a multiple of five times that cash flow, Mr. Lache estimates, for an enterprise value (market capitalization plus gross debt) of about $63 billion. GM would have about $32 billion in debt remaining. There is other cash, but for this exercise, we allocate the cash and other things like the short-term health-care trust to cover restructuring costs. There would be $31 billion of equity value at the newly restructured company.

The shareholders sacrifice the potential upside from a restructuring but would avoid a bankruptcy filing. Thus, with GM's market cap growing to $31 billion from $11 billion, they can let the workers have the remaining $20 billion in additional value created by the radical restructuring.

In this plan, the workers would get about $148 billion in assets for the $155 billion that they are owed. That amounts to almost $250,000 of value, on average, for the roughly 600,000 active workers, retirees and spouses covered under the pension plan.

To be sure, workers would still come up short $7 billion and many older workers would be counting on risky shares in a difficult industry to make up for reduced benefits. But what's the alternative? It's probably more than they would get after years of deterioration led to bankruptcy. And shares would provide a chance for upside.

"There is almost a universal recognition that the union already owns the majority of this enterprise. This crystallizes it," Mr. Lache says.

The academic research suggests that employee-ownership plans work best if employees are given some say in the management. It has rarely been tried on a grand scale. United Airlines became majority owned by the employees, but failed for myriad reasons having to do with an ill-designed plan and the industry's troubles.

"Just owning a piece of the action without affecting the value has no value," says Avner Ben-Ner, a professor of industrial relations at the University of Minnesota's Carlson School of Management.

So in order to make up for the loss of benefits and the risk of stock ownership, the plan would give GM workers board seats and thereby a say in running the company.

The employee-owner solution isn't easy. Management and the union have very prickly relations, which would make negotiations tough. There would be complicated tax implications and legal hurdles requiring legions of lawyers and investment bankers, and, probably, congressional intervention. In another era, the Detroit collapse would be a matter for a presidential summit.

Saving GM is important enough to the American economy to start the conversation.

How would you save GM? Send questions and comments to longandshort@wsj.com.
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Karl
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Username: Karl

Post Number: 930
Registered: 09-2005
Posted From: 72.25.177.194
Posted on Thursday, January 26, 2006 - 12:35 am: Edit PostDelete PostMove Post (Moderator/Admin Only)

As they learned at United Airlines, be careful what you wish for. The unions have long felt they knew more than management - giving them the whole enchilada sounds like a great idea - except for the downside, when, if they failed, they'd cry for a govt bailout.

As we watch what is happening with the auto co's and airlines, the next shoe to drop will be in the public sector, which now is whistling past the cemetery. We've learned it is very difficult to price a car or plane seat based on what a hip replacement will cost in 25 years. In the public sector, millions are counting on that wonderful old standby - just raise taxes! Ah, their time is coming also........

Sorry to say, no solutions here, just thoughts. Unfortunately, the solutions won't be pretty, but dealing with them is long overdue and necessary.
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Gmich99
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Username: Gmich99

Post Number: 47
Registered: 11-2005
Posted From: 65.29.97.102
Posted on Thursday, January 26, 2006 - 3:17 am: Edit PostDelete PostMove Post (Moderator/Admin Only)

Solution: Move all the factories to China and call it free trade.
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Gmich99
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Username: Gmich99

Post Number: 48
Registered: 11-2005
Posted From: 65.29.97.102
Posted on Thursday, January 26, 2006 - 3:17 am: Edit PostDelete PostMove Post (Moderator/Admin Only)

Solution: Move all the factories to China and call it free trade.
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56packman
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Username: 56packman

Post Number: 25
Registered: 12-2005
Posted From: 129.9.163.234
Posted on Thursday, January 26, 2006 - 12:47 pm: Edit PostDelete PostMove Post (Moderator/Admin Only)

Dateline: Detroit 2010--the UAW now owns and controls GM. Cigarette smoking is allowed everywhere thru out the Ren Cen complex. All work of any kind is suspended for deer season.
An agressive program is started allowing GM employees to trade below-market-price new GM cars for recational vehicles, bass boats,snowmobiles, ATV's and motorcycles.
Car/truck models have stayed exactly the same since the UAW took control two years ago. The list price of all vehicles produced increases by 15% each year, in order to avoid layoffs, loss of benefits,or loss of pay for job bank employees.
Toyota is the worlds largest manufacturer of cars and trucks, and there is rumor that UAW-GM brass is interested in buying all of their engines from Toyota.
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Livernoisyard
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Username: Livernoisyard

Post Number: 137
Registered: 10-2004
Posted From: 69.242.223.42
Posted on Thursday, January 26, 2006 - 2:51 pm: Edit PostDelete PostMove Post (Moderator/Admin Only)

I thought that GM's debt was upwards of $280 billion. How did that idiotic writer at the WSJ come up with only $155 billion?

Is he so stupid to conveniently think that the bond holders (secured creditors) would be even more stupid to forgive the bonded debt owed them? Not likely. But that scenario would totally ruin his fairy-tale pipedream.

But even more troubling today is the amount of loss at GM predicted by the financial pundits who predicted a Q4 loss of some 10 to 16 cents per share instead of the reported $2+ loss per share in operating losses. Those experts and that writer are similarly clueless in finance, it seems.

General Motors Corp. lost $4.8 billion, or $8.45 per share - in the fourth quarter of 2005
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Dove7
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Username: Dove7

Post Number: 1944
Registered: 11-2003
Posted From: 24.5.195.127
Posted on Thursday, January 26, 2006 - 3:06 pm: Edit PostDelete PostMove Post (Moderator/Admin Only)

Make better cars and be consistent when doing this. That's all to it. their car sells were poor last year and Toyota's and Chrysler were good. Honda had car and truck of the year. G.M. and Ford better watch out. The Japanese are now getting into the truck territory..Something that the big2 were having success with. Honda did a damn goood job with their trucks.
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56packman
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Username: 56packman

Post Number: 27
Registered: 12-2005
Posted From: 129.9.163.234
Posted on Thursday, January 26, 2006 - 3:18 pm: Edit PostDelete PostMove Post (Moderator/Admin Only)

If Toyota ever makes a pick up with a 4X8 bed it will be a dark day in Dearborn
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Track75
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Username: Track75

Post Number: 2200
Registered: 10-2003
Posted From: 12.75.18.197
Posted on Thursday, January 26, 2006 - 5:04 pm: Edit PostDelete PostMove Post (Moderator/Admin Only)

Livernoisyard, you're confusing GM's Balance Sheet debt of $287B with their off-balance-sheet pension and health care liabilities of $155B. The analyst you're calling stupid understands the difference.

GM stopped giving earnings guidance last year thus the analysts lacked much of the data needed to accurately forecast quarterly earnings. They certainly missed the mark though, didn't they. Of the dozens of analysts that follow GM the most pessimistic of the bunch had an earnings estimate of a loss of $1.72 per share versus the actual loss of $2.09. No one expected such terrible performance from GM last quarter.
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Livernoisyard
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Username: Livernoisyard

Post Number: 138
Registered: 10-2004
Posted From: 69.242.223.42
Posted on Thursday, January 26, 2006 - 10:02 pm: Edit PostDelete PostMove Post (Moderator/Admin Only)

The WSJ writer made no real attempt to make the bonded creditors (who legally would come first) owners after reorganization. That's ethically dishonest on his part in his not taking that higher-priority claim into consideration or even mentioning the fact.

In any event, a federal bankruptcy judge would rule anyway.
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Track75
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Username: Track75

Post Number: 2204
Registered: 10-2003
Posted From: 12.75.19.101
Posted on Friday, January 27, 2006 - 11:18 am: Edit PostDelete PostMove Post (Moderator/Admin Only)

Livernoisyard, the scenario put forth in the WSJ piece doesn't involve a bankruptcy. There's no change in the position of the secured creditors -- GM would continue to operate as it has, the change would occur with who holds the equity portion of the company (currently the general public, in the WSJ scenario, the employees).

If a bankruptcy were to occur then the stockholders, whoever they were, would cede control to the creditors as usual. Nothing that I can see in the proposed scenario changes that.
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Livernoisyard
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Username: Livernoisyard

Post Number: 142
Registered: 10-2004
Posted From: 69.242.223.42
Posted on Friday, January 27, 2006 - 7:52 pm: Edit PostDelete PostMove Post (Moderator/Admin Only)

How might the SEC rule in such a scenario even without GM's going into bankruptcy? Would the SEC allow such conversions, especially with imminent bankruptcy looming? Placing considerable equity in the hands of employees might be considered a grave risk to the "secured" bonded equity "owners." How would that proposal work without jeopardizing the bonded debt?

The common-share "owners" actually own next to nothing, at present. A bit down the road, they'll be in the same shape as K-Mart or Delphi common-shareholders. Why reward mainly just the UAW retirees when one could surmise their being overpaid was a major part of the problem at GM?
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Track75
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Username: Track75

Post Number: 2209
Registered: 10-2003
Posted From: 12.75.21.78
Posted on Saturday, January 28, 2006 - 8:43 pm: Edit PostDelete PostMove Post (Moderator/Admin Only)

Whether or not this plan would receive approval from those agencies with yes/no authority is an open question.

I'm not clear on what you mean when you refer to the "secured" bonded equity "owners." so I'm not sure what you're asking.

The bondholders are already at risk, GM debt trades at around 72 cents on the dollar, that's highly speculative. The equity portion is even more speculative. The future of the pensions and health care is also uncertain. Swapping some liabilities for some equity might not change the overall risk too much. Who knows, this seems like a real long-shot scenario.
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Mike
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Username: Mike

Post Number: 570
Registered: 11-2003
Posted From: 24.176.58.18
Posted on Saturday, January 28, 2006 - 10:49 pm: Edit PostDelete PostMove Post (Moderator/Admin Only)

Things at DCX are not as rosy as the 300C would make you think.

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