NEW York, March 7, 2013. Like Benjamin Button in the 2008 movie, New GM is a toddler yet strangely old in appearance, at least from a financial perspective.
Akin to Button in fictional life, GM’s fortunes in real life seem to decline with the passage of time starting with the Company’s official rebirth on July 10, 2009. This phenomenon is odd indeed, as I began to explain, here, here and here.
Perhaps I simply do not “get it”. According to Monica Davey, in a recent, page 1 New York Times piece:
“…Detroit’s car companies have experienced what once seemed like the unlikeliest of comebacks after the financial crisis. General Motors and Chrysler emerged from bankruptcy filings and government bailouts to far more upbeat signs….”
Bravely, I submit that Ms. Davey and her editorial colleagues have not yet read much of the detailed, publicly available information concerning GM’s financial results. While the information is dense going even for those steeped in accounting and other minutiae, it provides incredibly important information.
Close, ongoing assessment of selected filings suggests that GM is not “thriving” in the classic sense of showing clear, glowing signs of prosperity—e.g. clean profits from operations that are likely to increase and yield reliable cash dividends for common shareowners.
Here are three new sets of observations arising from my continuing review.
The Birth of New GM Deserves Much Closer Scrutiny than Mainstream Analysts and the Wider Media have Performed to Date. The United States’ operations of GM entered Bankruptcy Court Protection early on the morning of June 1, 2009. Some 40 days later, substantially all of the vital business lines of this storied manufacturing enterprise were purchased by a “NEWCO”. This mind-bending transaction, effected pursuant to Section 363 of the U.S. Bankruptcy Code received historic, precedent-setting support from the Governments of the United States and Canada and from the United Autoworkers Union. Overhaul by Steve Rattner, is a first-hand account that covers some restructuring wizards and politicians in glory but wisely refrained from making conclusive judgments when it appeared in print during 2010.
With the benefit of “20/20 hindsight”, critics have begun amplifying early concerns about the wisdom of rushing GM’s re-birth.
Judge Robert E. Berger remains mired in consideration of one important, though relatively small, detail in connection with this expedited transformation achieved in 2009.
In this unsettled matter, a number of parties may have concealed arrangements relating to securities of one GM Canada subsidiary—possibly constituting a “fraud” upon U.S. Bankruptcy Court. This may be important in financial terms. To me, an even larger contextual issue seems to be getting the details of the original business and financial case for handling GM in the way it was handled and tracking how New GM has been doing versus the business plan referenced in section 4.1(t) of Treasury Loan Documents dated July 10, 2009.
I cannot locate this set of projections in the public domain and I appreciate any lawful help in remedying this deficiency.
Publicly Available Evidence Does Not Yet Suggest, with Clarity, that Management has Restored GM’s Operating Vitality. Some analysts do not remember the last time management teams routinely urged the investing public to concentrate upon “Non-G.A.A.P.” (Generally Accepted Accounting Principles) financial metrics. This was in the frothy winter of 1999-2000, before a different early March. Back then, the internet bubble suddenly burst and destroyed many billions and countless unwise investors in a New York minute.
More recently, GM management made their high-level case to the investing public on February 14, 2013 and placed heavy emphasis on the course of “EBIT-Adjusted” (Earnings Before Interest and Taxes). Detailed and audited information filed as of one day later appears to confirm that GM’s “Automotive” Gross Margin actually declined from 12.4% in 2011 to 6.7% in 2012. These levels are dangerously low for a capital-intensive business that operates in a global vehicle manufacturing industry where capacity is much higher than local demand throughout such important national markets as the United States, Japan and Germany, to pick only three of the many relevant ones.
What seems particularly alarming in these recent disclosures is the suggestion that “capacity utilization” in GM North America (“GMNA”) rose from 95.6% during 2011 to 97.5 % in 2012. Now “capacity utilization” is admittedly a soft measure whose supporting assumptions deserve close scrutiny, plant by plant, vehicle class by vehicle class and country by country. So far, the public has not been able to check this material assertion concerning GM North America. I can tell you with certainty, no proficient restructuring expert hoping to retain credibility would claim “victory” having restructured a capital-intensive business if it only achieved a Gross Margin of 6.7 % (the level posted for the entire Automotive Segment) at 97.5 % capacity utilization.
So far, GM has chosen not to disclose Gross Margin information for GMNA and we sincerely hope it was higher than 6.7 % in 2012. We also urge GM to provide granular geographic and vehicle class data concerning key financial and operating metrics that is then reconciled into GM’s consolidated and consolidating financial statements.
To Have a Meaningful Debate over Whether GM has been Successfully Restructured, We Must First Agree How “Success” is Fairly Defined. Let us leave aside, for the moment, excellent questions concerning whether important legal precedents set in the 2009 Bankruptcy Proceeding and its aftermath may actually prove corrosive to the process of supporting other significant companies facing re-organization through United States Bankruptcy courts.
Let us park consideration of whether it was prudent for Governments to purchase illiquid, risky equity securities using borrowed funds that must be repaid with accumulated interest even if the attempted restructuring of GM eventually fails.
Further, let us leave for later the question of whether an under-funded benefit plan should hold concentrated positions in GM securities considering the downside possibility that these securities and worker incomes might be lost should new GM have to be restructured again in a scenario I see looming where the global economy re-enters existential crisis.
Let us simply consider what financial return investors in New GM should have targeted for taking the mammoth risks they did take more than four years ago when it certainly was not clear the rescue attempt would actually work.
I do not believe a fair measure of success is just getting back the peak cumulative principal amounts that were placed at risk to give birth to New GM itself. I think we should consider how much capital, has supported Ally Financial (a U.S. government-owned entity that provides important financial support for GM’s dealers and for numerous end-use customers of GM). Moreover, I think the investors should, in the end, earn a reasonable multiple of a fair “risk-free” rate that might have prevailed absent Central Bank intervention, plus return of all principal sums. Unless and until that higher bar is attained, I do not believe the New GM story can be fairly deemed a true “success”, measured in financial terms.
Whether GM is actually fit and aging “normally” is a question that deserves the attention it finally seems to be getting. I know there are astute, informed, and incisive minds in the financial media and in the investor community.
Let us proceed to have a real, rigorous, and public debate concerning what may have happened at GM since July 10, 2009 when the Company was reborn out of bankruptcy.
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