GM's Financial Engineering

[Hurricane]

GM's Financial Engineering
Evelyn M. Rusli, 05.24.07, 5:30 PM ET

Got a dime? General Motors could use it.

In an effort to turn the corner in its troubled core business, General Motors is eager to end its financial obligations to Delphi, the former auto parts unit it spun off in 1999. But, the exit will be an expensive one— to the tune of $7 billion— the carmaker said on Thursday.

The $7 billion price tag, which includes an initial payment of $500 million when Delphi comes out of bankruptcy and annual labor-related payments, came in at the high end of the $6 billion to $7.5 billion liability range the company had predicted. Negotiations are ongoing but many analysts believe the $7 billion estimate will stick.

The cash-strapped auto maker also announced on Thursday that it may sell its profitable Allison Transmission business for an undisclosed sum and will hock its 49% stake in GMAC, a financing unit, for a $4.1 billion revolving line of credit and $1.1 billion in convertible debt.

These days, it seems the only thing that separates General Motors from Chapter 11 is its ability to raise cash, fast— even if that means piling on stacks of loans. General Motors has about $41.4 billion of long-term debt, while it is only worth around $17.2 billion on the stock market.

Beyond the Delphi debacle, GM needs a quick cash infusion for other reasons. With union negotiations coming up in September, GM will need to amass a war chest to prepare for bumps in the process, particularly, in the case of a strike. In addition, given the bleak outlook for the U.S. automotive industry this year, as subprime woes and gasoline prices weigh on consumer sentiment, a rich cash reserve could help the company hedge against weak results.

And with private-equity funds still flush with cash and apparently hungry for new acquisitions, the timing for an Allison sale seems right. “GM could fetch a pretty penny for Allison,” that should exceed $1 billion, Healy said. Allison, a maker of transmission devices for large vehicles, is profitable but adds little strategic value to GM’s overall portfolio.

However, will these fundraising efforts be enough for GM? The sale of Allison and the batch of new loans will give it the cash boost it needs to fix short-term problems, but it will also increase the mounting pile of debt. Looking ahead, Financing could be a problem as its credit rating continues to get battered. On Wednesday, Fitch Ratings downgraded GM's unsecured debt rating one notch, to B-minus, deep in the junk-bond category.

More here: http://www.forbes.com/2007/05/24/gm-...rtner=yahootix

[WishIhadatruck]

It seems we had a nice stretch of time there with little bad/negative financial news about GM. I guess it couldn't last forever. This summer's negotiations with the unions are critical. They really need to address long term obligations to the employees in retirement. They quit offering health care in retirement to salaried employees back in '91 or '92. Here it is 15 years later and they can't do the same with the union employees? There is no way they can afford it over the long haul. I don't think GM will survive without some serious concessions. If they start making the best cars in the world across their entire product line they will still struggle to increase market share. Increasing market share while keeping a competitive profit per vehicle is the only way they can survive the way things are stuctured with the union now and that won't happen.

The company I work for now converted all pensions and retirement health to cash balance plans. I know it is tough on employees but there is no way the companies can afford to pay for this stuff in the long run, especially as long as people live now. They've got the same problem as the social security system, guaranteed lack of funds without some serious changes.

[jbartley]

darn, they need to be using that money to dig a whole large enought to bury the UAW in.

[YupYupYup]

Originally Posted by jbartley

darn, they need to be using that money to dig a whole large enought to bury the UAW in.

Nice...

[redimpss5]

Originally Posted by jbartley

darn, they need to be using that money to dig a whole large enought to bury the UAW in.

Lame thinking, Lame spelling...Thank you please drive thru!!

[asim]

7 billion? Thats like even more than what GM paid to get out of a deal with Fiat. Ugh. I hate GM getting into these stupid deals and then having to pay BILLIONS of dollars to get out of them. lol

[jaywestfall]

I have never been in the auto industry, but how about no one from rank and file to CEO gets any benefits until the company meets performance criteria that makes it number one again?

[Lewie]

Originally Posted by jaywestfall

I have never been in the auto industry, but how about no one from rank and file to CEO gets any benefits until the company meets performance criteria that makes it number one again?

I don't believe GM paid out bonuses this year, not to mention pay cuts for top execs, plus they cut dividends in half.

[gardnet1]

I read were they were also considering the sale of their medium-duty trucks to Navistar.

[soloyosh]

GM sold its Desert Proving Grounds in Novermber to boost its annual bottom line by a measly $250 million (below market price). They have to be out of DPG by November of 2009. They don't have a contract signed on a new place. Rumor is that the durability operation is going to Mexico. By all accounts once they sign on a new place (the Army has "welcomed" GM to Yuma Proving Grounds) it'll cost between $400 and $550 million to build the new place and move everything. I say everyTHING because almost none of the current staff is moving to Yuma. Most are taking an early retirement, lateral move to elsewhere in the company, or just quitting. Others that have said they will move are quietly saying that they are looking at other options and that if they have to move they'll stay in a travel trailer for 4 days out of the week in Yuma and then commute home to Phoenix on the weekends.

So this deal could end up costing a couple hundred million dollars and North American Operations will be losing the staff that make DPG the most efficient of GM's proving grounds.

Yes they are building good cars now but there's still real problems at GM. "Financial Engineering" is an apt term for whats going on.

[MikeB]

It's like the Forbes article said - they are going to use Visa to payoff their Mastercard.

I hate to say it, but the auto industry is going the same direction the US steel industry went.

It all started in the 1950's when the CEOs and VPs stopped talking about designing cars and the market trends and started to focus on Wall Street, quarterly returns, and how to get their individual yearly bonuses.

Poor negotiations with the union over the last 50 years have also resulted in a huge burden rate. You can't entirely blame the UAW - the management proposed and agreed to these terms over and over. They only agreed so that the greedy top managers could could keep operations rolling and show good results to Wall Street and they get a big bonus.
Were those people back in the 1960's, 70's and 80's thinking about the impact it would have on the business in 2007? Hell no!! And where are those people today? I'll give you one guess... They're not at GM anymore.
CEO's and VP's in corporate America play musical chairs more than a kindergartener. Typical overpaid, self-serving American business executives. It's happening in all business sectors across the country.

Good luck, GM

Just my $0.10 :-)

[Highlander]

Scary when they keep cutting off the profitable portions of the business to keep going. Isn't that sort of curing the disease by killing the patient?

I just don't see how selling off Allison is healthy long term. I understand the need for short term survival, but at some point it becomes at the sacrifice of long term survival.

[timman]

Originally Posted by Lewie

I don't believe GM paid out bonuses this year, not to mention pay cuts for top execs, plus they cut dividends in half.

Let's not leave out the reduction in wages that were to be given to the rank and file last September. Somewhere in the range (depending on skilled trades) of about $2500.00/year.

[jeep2c]

GM's problem is it keeps selling portions of itself while retaining the liability of said portions.

GM spins off Delphi... while Delphi is profitable all the profits go to delphi. Now Delphi is bankrupt and GM is paying for it.

GM sells of GMAC... while GMAC is profitable all teh profits go to GMAC. Now GMAC is losing money and GM is paying for it.

Nice how these sell offs are costing more than they're making.

[1931Chevy]

7 billion? Thats like even more than what GM paid to get out of a deal with Fiat. Ugh. I hate GM getting into these stupid deals and then having to pay BILLIONS of dollars to get out of them. lol

Ask Daimler about stupid deals, they had to pay 38billion back in 98 for Chrysler and to get rid off them they have to pay 500 million extra