General Motors Part 2

The stock market is in a good mood this morning. Shortly after the open, the Dow is up over 140 points.

The General Motors IPO was priced at $33 per share. The 478 million shares sold will raise over $20 billion for GM. Including the overallotment, the total IPO could be $23.1 billion which would be the largest ever.

The U.S. government isn’t doing so well on its investment. The Treasury offered about 358.5 million shares in the IPO, about 95 million more shares than initially planned. The Treasury’s cost basis is $43.67 per share. With today’s IPO, the 500 million shares left need to be sold at an average price of $53.07 per share to make a profit. I’m not sure that’s going to happen.

The IPO brings the Treasury’s stake to 37% from 61% (or 33% with the overallotment).

So far, the stock is getting a little pop. The shares have been as high as $35.99 this morning.

Here’s what I wrote about the old GM nearly five years ago:

Whither GM?

In 1979, the British economy was in freefall. Inflation was spiraling out of control. The unions were demanding commensurate pay increases, and when they didn’t get them, they struck. The country that had stood up to the Luftwaffe was falling apart. The garbage men went on strike and soon piles of “rubbish” dotted the countryside. Even the gravediggers went on strike and corpses were gruesomely left unburied.

The winter of 1978-79 was called the Winter of Discontent, echoing the opening lines of Richard III. The situation was so bad that Her Majesty’s government had to apply for a loan from the IMF. This was back in the days when doing so was deemed shameful. You were even expected to pay it back.

A reporter asked the Prime Minister, James Callaghan, his opinion of the “the mounting chaos in the country.” Callaghan said: “Well, that’s a judgment that you are making. I promise you that if you look at it from outside, and perhaps you’re taking rather a parochial view at the moment, I don’t think that other people in the world would share the view that there is mounting chaos.”

That was it. British socialism died right there. The commanding heights were nothing more than a literal heap of trash. The next day, The Sun’s headline read: “Crisis? What Crisis?”

I can’t help but think of the similarities between British socialism and General Motors (GM). Once upon a time, GM ruled the world. Today, it’s an embarrassment. What’s good for GM is largely irrelevant to America.

For reasons unclear, billionaire Kirk Kerkorian sunk a good part of his fortune in GM’s stock. His investment has been a disaster. Now’s he’s sent his aide, another son of York, Jerome York to be exact, to Detroit to tell the automaker everything they’re doing wrong. The New York Times quotes York as saying: “The time has come to go into crisis mode and act accordingly.”

No, the time to go into crisis mode has long since past. GM is a fiscal black hole. The company burns through $24 million every day. That’s more than the Yankees. Yet the company still pays out $566 million per year in its dividend. Crisis? What Crisis?

Talk about unburied corpses. I honestly don’t think GM will survive this decade. Even if it does, it will hardly be recognizable. Any future GM will merely be a Commonwealth living in the shadow of a by-gone Empire. York’s plan is to get rid of the dividend and reduce the pay of senior management. Well…that’s a nice start, but I think GM will have to go a lot further, perhaps ditching some key brands like Hummer.

The New York Times quoted Frederick A. Henderson, GM’s new CFO:

“To be honest, I am in crisis mode. So I agree with him,” Mr. Henderson said. In December, he succeeded John M. Devine, now a G.M. vice chairman, who accompanied him to Mr. York’s speech. Like Mr. Devine, Mr. Henderson watched impassively while Mr. York spoke.

Impassively? Ha! I bet they were ready to toss him out the window. I’d actually feel much better if GM were really in crisis mode. They’re not. They’re sleepwalking. Perhaps now, they’re sleeprunning. This is a company that plainly refuses to see reality. They’d be plenty happy to go on ignoring the mess they’ve made, but high oil prices have forced the issue. The long-run was much shorter than any of us expected.

The idea that GM can discount its way home is a foolish illusion. The facts are clear. Every GM car carries about $1,500 in health care costs. The employees’ health care trust has over $20 billion, and GM had to tap it twice recently for $1 billion each time. Retirees outnumber current U.S. employees 2.5 to 1. The company has stopped providing earnings guidance.

GM’s problem isn’t cars or legacy costs. Companies can deal with those. What GM has is a leadership crisis. They need to make major changes soon. If not, the Winter of Discontent will last a very long time.

Posted by on November 18th, 2010 at 9:52 am


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