General Motors Corp filed for bankruptcy protection in a Manhattan courtroom yesterday, a step United States President Barack Obama characterised as painful but necessary to "give this iconic American company a chance to rise again".
As much as the filing signals a new era in the story of United States industry and a low point for the century-old carmaker, GM executives also characterised the decision as a chance to start over.
"Today marks a defining moment in the history of General Motors," said Fritz Henderson, the carmaker's chief executive, speaking in New York after the filing. "This allows us to permanently address problems that we have not been able to address before today."
The carmaker that emerges from Bankruptcy Court in as little as two to three months will be dramatically different from the one that exists today. The United States Government will become the majority owner of GM, with a 60% stake, a move Mr Obama said he made reluctantly to protect an investment of $30.1 billion in additional taxpayer money to steer the company through bankruptcy.
The rest of the company's stock will be split among the Government of Canada, the United Auto Workers union, and holders of $27 billion in GM bonds who have agreed to forgive their debt in the company.
Despite his Administration having the controlling stake, Mr Obama vowed that GM would be run by a private board of directors and that the US Government would not be involved in day-to-day decisions, such as opening new plants or launching new vehicles.
Simply loaning GM more money, instead of taking equity in the company, would have continued to saddle GM with "irresponsibly large debt," the reason the company was in its current dire position, Mr Obama said. "We are acting as reluctant shareholders because that is the only way to help GM to succeed," he said.
For now, however, GM's fate will lie in the hands of Judge Robert Gerber of the US Bankruptcy Court for the Southern District of New York, where the company filed its paperwork.
Chrysler's ongoing bankruptcy case was filed in the same court, and the smaller carmaker is expected to emerge as soon as this week. On Sunday night, the judge overseeing that case approved a sale of its assets, opening the door to a merger with Italian carmaker Fiat.
Despite the substantial costs of a bankruptcy to GM employees, dealers and US taxpayers, company officials settled on a surprisingly upbeat tone, even as they acknowledged the seriousness of the development.
"Why would a CFO be smiling when he's filing for his company to go bankrupt?" asked Ray Young, GM's chief financial officer.
"I've never been so invigorated in my life. This is a once-in-a-lifetime opportunity to get our balance sheet healthy."
It will be doing that with taxpayer money. To keep GM afloat as it restructures, the Obama Administration will add $30.1 billion in taxpayer funds to the $20 billion already loaned to the company. In exchange, the US Government receives a 60.8% ownership stake.
In its filing, GM reported $83.3 billion in assets against $172.8 billion in debts. The carmaker plans to sell much of its assets into a new entity, shedding all but $17 billion of the debt in the process. It will have fewer brands, fewer dealers, fewer factories and fewer employees - and a plan to be able to make a profit.
GM said yesterday it would shut 14 plants, including seven in Michigan and the original Saturn factory in Tennessee. It also said it would eliminate 5000 white-collar jobs by year's end.
GM shares continued to trade yesterday, but the Dow Jones said it had dropped GM from its industrials index, replacing it with Cisco Systems Inc. GM will drop out of New York Stock Exchange trading tomorrow, moving to the so-called pink sheets market.
A source familiar with the company's restructuring plans said the carmaker expected that shares in the newly reorganised company would begin trading during the first quarter of 2010. Mr Henderson said that existing shareholders would lose their investment "in entirety".
Administration officials said they hoped to shed the investment as soon as possible. With input from the Administration's auto task force, GM is in the process of selecting a new board of directors, a process expected to conclude in the next several months.
That board will run GM operations, without oversight from Washington, except in the most significant of corporate decisions. Unlike in the past, GM will keep its chairman and chief executive positions separate.
The previous leader of GM, Rick Wagoner, who was dismissed by Mr Obama in March, held both jobs.
Q&A: General Motors
General Motors hopes to emerge from bankruptcy as a leaner and more competitive company in the global marketplace. But the company's actions have raised several questions:
Q: Does bankruptcy mean GM is going out of business?
A: No. GM is entering a Chapter 11 restructuring in which a troubled company goes to court and asks for protection from its debts and time to figure out what to do next. Typically, debt-holders get a percentage of what they are owed so the company can remain in business.
Another type of bankruptcy, Chapter 7, is a going-out-of-business exercise. It is when a failed company is sold off for parts.
Q: What happens to GM shares?
A: Because of the bankruptcy, GM will be delisted from the Dow Jones Industrial Average on June 8 and its shares will become worthless. If GM emerged from bankruptcy, it would do so as a private company and then stage an IPO to go public, the company said yesterday.
The shares still have a few days to live, however, so professional traders are buying and selling them to manipulate the price for profit. Also, said the Motley Fool's Joe Magyer, some novices did not understand that the shares would soon be worthless.
Q: How did GM end up in bankruptcy?
A: That is a complex question that will be debated in business schools for years to come, but a few obvious reasons stand out. For decades, GM was a virtual monopoly in the United States and adapted slowly to change when the oil crises of the 1970s hit and the Japanese imports started streaming in.
Also, GM was forced to capitulate to escalating union demands for years that not only drove up wages, making GM less competitive with foreign carmakers who paid their workers less, but burdened GM with billions of dollars in health and retiree costs, which also drove up the cost of making vehicles.
Finally, GM depended too heavily on high-profit trucks and SUVs in the 1990s, essentially giving up the passenger-car market to foreign carmakers. Even though GM was able to win the promise of wage and benefit concessions from the union in 2007, they would not take effect until 2010. When the price of petrol reached $4 per gallon, the recession hit and the credit markets froze up last northern autumn, it was more than GM could withstand.
- by Ken Bensinger and Jim Puzzanghera
