Restructure or Bankruptcy: Tough Choices for General Motors as June 1 Deadline Grows Closer

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Researched by Industrial Info Resources (Sugar Land, Texas)--After failing to provide a viable restructuring plan to the Obama administration by the deadline, General Motors Corporation (NYSE:GM) (Detroit, Michigan) is teetering on the brink of the most important decision the company has ever faced. While it continues to work feverishly to develop a viable restructuring plan that the administration will approve, GM is also working out the details of a potential bankruptcy proceeding, should it come to that. President Obama and his advisers have given the automotive giant a June 1 deadline to submit a viability plan, or off to bankruptcy court it goes.

New Chief Executive Fritz Henderson has taken a more pragmatic view of the company's future since he took over for former chief Rick Wagoner, who was forced to resign by the administration on March 31. Henderson has taken the view, from the start, that bankruptcy is a very real option and must be investigated fully before the imposed deadline. To that end, he has two teams working on the problem with one examining restructuring options and the other preparing GM for potential bankruptcy hearings.

While restructuring is still a viable possibility, the likelihood of the automaker going that route grows slimmer every day. To achieve a realistic restructuring, GM will have to gain major concessions from the United Auto Workers (UAW) (Detroit) union and bondholders who will need to find a way to exchange $28 billion in debt into equity stake in GM. On the union side of the equation, GM and the UAW have to come to an agreement about financing the pension plan while GM continues to hemorrhage money.

Some kind of a strategic bankruptcy appears to be the more likely option in the long run. Many experts feel that if GM were to get rid of its poorly selling brands then split the company into two entities for a bankruptcy filing, GM could recover, albeit as a much smaller version. The Saab and Hummer brand names have been up for sale for a while with no takers to date, and GM wants to dump Saturn, as well, a brand that began with such promise and was driven into the ground by forces within GM's own management team.

The viable brands that GM currently makes include Chevrolet and its lineup of trucks, cars and SUVs and Cadillac with its higher end luxury vehicles. The other brands GM produces, Pontiac, GMC and Buick, would probably not be worth saving, although GM's management is still arguing over which brands should be salvaged. If the bankruptcy option is what GM ends up having to take, it could easily spin off Chevrolet and Cadillac into a single company, which would require $5 billion-$7 billion in governmental aid, that could rip through the bankruptcy process in as little as two weeks. The other company that would form, made up of Pontiac, Buick and GMC, would be stripped down and sold off as best it could over a longer period and could possibly cost the tax payers up to $70 billion in additional aid, much of which would go to funding the healthcare obligations GM is facing.

Whichever road GM chooses to travel, it will have to cut more jobs and close more plants to achieve any kind of viability. It is currently operating plants that are down to running single shifts or even alternate shifts on a weekly basis since the sales market is simply not there to support continued operations. Once GM comes up with a final plan for which brands it will maintain and which brands it will cut loose, some significant and serious decisions will have to be made about which and how many of its production and assembly plants it will keep in operation.

There is no easy way out of this situation for the automotive giant. After decades of poor management decisions, allowing the union to run roughshod over management, and terrible brand development, GM is going to be forced to do the things to itself that it should have been doing all along. These decisions and the resulting actions have been a long time coming and, unfortunately, will mean the loss of thousands of more jobs within a sector that is reeling from the recession. The automotive sector will survive but it will obviously not survive intact. The time has come to pay the piper and the real losers here are the people who put their faith in GM's management to run the company responsibly, profitably and competitively -- things that did not and have not been happening for decades.

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