General Motor’s Bailout and Recovery (2009), Essay Example

Introduction

It was on March 30, 2009 that President Obama laid the grounds for General Motors to accomplish capability but in order to accomplish this GM had to rework its business plan, hasten its functioning reformation brutally cut back on its liabilities. As a result, the President has deemed GM’s plan workable will be allocating approximately $30 billion of supplementary federal assistance to aid in GM’s streamlining plan. “To effectuate their plan, General Motors will use Section 363 of the bankruptcy code to clear away the remaining impediments to its successful re-launch.” [1](Sweet, 2009).

Financial Implications

GM already has a financial obligation of $20 billion to the UAW’s VEBA. Under the new reorganization scheme, GM will be responsible for funding healthcare to its employees which will be established through independent trust (VEBA) “The VEBA will be funded by a note of $2.5 billion payable in three instalments ending in 2017 and $6.5 billion in 9% perpetual preferred stock. The VEBA will also receive 17.5% of the equity of New GM and warrants to purchase an additional 2.5% of the company.” [2](Sweet, 2009). The US Treasury will participate in the restructure by contributing $30 billion through expedited Bankruptcy 11 proceedings. Canadian and Ontario plan to contribute by lending $9.5 billion to General Motors.

“Despite all of this financial assistance, GM has still fallen short in the credit rating department with their credit rating falling from a CCC+ to a D with the implication that the firm has a 80% chance of going into default next year. Projections are that GM’s sales will decline approximately 20% over the next year.” [3](Snorkin, 2009). The company is forced to cuts its expenses dramatically to escape Bankruptcy 11 filing.

The Disappearing Dividends

According to CNN Money.com and GM research, GM is still struggling to pay $2 billion in dividends owed to the American shareholders. It appears that the share price has dropped dramatically by 50% in the last half year. GM announced plans to close more than a dozen facilities over the next year and cut more than 30,000 hourly and salaried jobs. It appears a more reasonable solution is for the managers of GM to give up the dividends. Chairman and CEO Rick Wagner would not give a formal comment on the plant closings but did comment that the Company plans to cut the stock dividends by $1.1 billion in common stock over the next year. Josh Peters, former auto analyst disagrees with the decision to pay out common stock of $1.1 billion at this present time. “He further states that GM is not the kind of stock that you might want to buy on the dividend because of lack of sustainability.” [4](Isidore, 2009).

N-Notes and Conclusion

The restructuring plan calls for GM to shrivel $27.5 billion in liability by attainment of bondholders to exchange their claims for equity. The Company must also diminish $20.4 billion in obligations to a union-run health-care fund under the new set up trust plan. The company is currently spending about $2 billion per month which is considered extremely above a budget headed towards bankruptcy. There appears to be a reserve of $16 billion in cash assets that cannot be touched by the Company. “Investment in a capital intensive, agony business like GM where market share is eroding, which began well before an economic recession does not seem like the wisest financial move for our government and other contributing governments.” [5](Taylor, 2008).  President Obama claimed that this struggling auto industry is essential to our economy. Results show that GM has not returned money to investors in years GM has never made money in the past in it is highly reasonable to question why the Company would make money now.

In contrast with other sales marketplace competitors, in July “GM’s market share was 18.9 percent. That compared with Ford’s 16.5 percent share and Toyota’s of 17.5 percent.” [6](Hedgpeth, 2009). The GM board has suggested moving forward the timelines for introduction of new vehicles in aspirations of making the GM Company profitable in the near future. Whitacre, former AT& T chairman stated that the employees’ talents and performance has been overlooked in these potential bankruptcy proceedings and the employees’ need the opportunity to showcase their talents. “There may be a “public offering” of the company in 2010. There were no comments made on alleged selling to foreign German based Opel unit which is also being sought by Canadian auto parts supplier Magna International and Brussels based company RHJ International SA.” [7](Hedgpeth, 2009).

Hummer Acquisition Finalized It All

GM stated they would continue to build Hummers for the new owner, China’s industrial company Sichuan Tengzhong under the new contract.” GM also stated in June after the Chapter 11 Bankruptcy filing that it would continue to assemble the H3 and H3T models at its plant in Shreveport, Louisiana until 2010.” [8](Chubb, 2009). Hummer sales went down 62% last year contributing to the $50 billion total deficit GM is currently in including governmental funding.

References

[1] Sweet L. (2009) General Motors bailout details Retrieved September 15, 2009 from, http://blogs.suntimes.com/sweet/2009/06/general_motors_bailout_over_vi.html

[1] Sweet L. (2009) General Motors bailout details Retrieved September 15, 2009 from, http://blogs.suntimes.com/sweet/2009/06/general_motors_bailout_over_vi.html

[1] Snorkin A. (2009) Bailout for G.M. may fall short, report says Retrieved September 15, 2009 from, http://dealbook.blogs.nytimes.com/2008/11/19/bailout-funds-for-gm-may-fall-short-analyst-says/

[1] Isidore C. (2009) Next GM worry: Disappearing dividend Retrieved September 14, 2009 from, http://money.cnn.com/2005/11/23/news/fortune500/gm_dividend/index.htm

[1] Taylor B. (2008) GM Bailout Would be Agony for Taxpayers Retrieved September 15, 2009 from, http://seekingalpha.com/article/106232-gm-bailout-would-be-agony-for-taxpayers

[1] Hedgpeth D. (2009) General Motors Chief Optimistic After Board Meeting Retrieved September 15, 2009 from http://www.washingtonpost.com/wp-dyn/content/article/2009/08/05/AR2009080501635.html

[1] Sweet L. (2009) General Motors bailout details Retrieved September 15, 2009 from, http://blogs.suntimes.com/sweet/2009/06/general_motors_bailout_over_vi.html

[2] Sweet L. (2009) General Motors bailout details Retrieved September 15, 2009 from, http://blogs.suntimes.com/sweet/2009/06/general_motors_bailout_over_vi.html

[3] Snorkin A. (2009) Bailout for G.M. may fall short, report says Retrieved September 15, 2009 from, http://dealbook.blogs.nytimes.com/2008/11/19/bailout-funds-for-gm-may-fall-short-analyst-says/

[4] Isidore C. (2009) Next GM worry: Disappearing dividend Retrieved September 14, 2009 from, http://money.cnn.com/2005/11/23/news/fortune500/gm_dividend/index.htm

[5] Taylor B. (2008) GM Bailout Would be Agony for Taxpayers Retrieved September 15, 2009 from, http://seekingalpha.com/article/106232-gm-bailout-would-be-agony-for-taxpayers

[6] Hedgpeth D. (2009) General Motors Chief Optimistic After Board Meeting Retrieved September 15, 2009 from http://www.washingtonpost.com/wp-dyn/content/article/2009/08/05/AR2009080501635.html

[7] Hedgpeth D. (2009) General Motors Chief Optimistic After Board Meeting Retrieved September 15, 2009 from http://www.washingtonpost.com/wp-dyn/content/article/2009/08/05/AR2009080501635.html

[8] Chubb P. (2009) General Motors and Hummer Sale: Who Bought the Brand? Retrieved September 16, 2009 from, http://www.product-reviews.net/2009/06/02/general-motors-and-hummer-sale-who-bought-the-brand/