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The Ultimate Value Trap – Bankruptcy Needed:

Last summer I published an article that focused on my pick for The Ultimate Value Trap in 2008; General Motors (GM).

GM closed that day at $10.78 after dropping 57% since the beginning of the year (it is now subsequently down another 86%). I received some harsh criticism from individuals sympathetic to the automakers, but I stood by my assessment that the company was struggling with not one, but several competitive disadvantages.

There’s been a lot of news, discussion and suggestions on what to do with GM, Chrysler and Ford with many claiming that their singular or collective failure would plunge the North American economy into a more severe recession. These suggestions have often come from individuals with a serious conflict of interest in seeing GM, and others, succeed (unions, management, & industry interests). The real problem with GM hasn’t been resolved yet and no finite amount of financial relief will change the infinite number of serious issues at hand in the industry.

This company is very ill and needs a DNR order: Do Not Resuscitate.

Either allow the company to die outright or provide the assistance it needs to restructure under creditor protection.

GM is septic and the pus is oozing from every orifice it has. Not only is GM bleeding equity and cash at an astounding rate, but it continues to be run by incompetent management who are unable to effectively make the decisions needed to save the company. Stalling any longer won’t help the situation and will likely cost more money in the long run than over the short-term.

Life support isn’t an option at this point as the financial systems of the company are already shutting down. Bankruptcy protection would save viable components of the company that can be utilized in the future after emerging from creditor protection. Right now there is too much chaos within the company, abundant excesses in the operations and contractual obligations that are crushing the company under their immense weight..

Gross mismanagement isn’t something that can be changed in the past, but it should has to be dealt with in the future. No bailout, funding or government assistance will make any sense or difference without a dramatic change in management at all levels of this company. The process for building a car and operating a car company are no different than any industrial good made by hundreds of global corporations and sold to customers (retail or business). Research that is years away won’t save them, insignificant cost cutting hasn’t made a difference so far and it’s no longer a question about the quality of their cars.

The facts facing GM and all stakeholders in this process are pretty simple and have not changed.
There is:

  1. Too much supply
  2. Too little demand
  3. Too many brands
  4. Too high a cost structure
  5. Too much ineffective management

I read over the annual report for 2008 this week and I’m afraid there’s not much positive news to report. Frankly, the annual report read like an obituary with the discussion provided by management as very negative on the prospects of the company without billions in financial support.

Highlights were that the company now has a Total Shareholder’s Deficit (yes…that’s deficit) of $86.1 Billion dollars. That’s the equivalent market capitalization of a company the size of Coca-Cola (KO), Genentech (DNA) or Pfizer (PFE) but in the opposite direction of dollars. Cashflows from continuing operations results were positive as they sank for the third straight year, but improved to -$30.8B (2008) versus -$43.3B (2007).

One section of the annual report that I especially liked read as follows:

In addition, our Viability Plan relies upon financial projections, including with respect to (1) revenue growth and improvements in earnings before interest, taxes, depreciation and amortization margins, (2) growth in earnings and cash flow, (3) the amounts of future pension contributions, (4) the value of unconsolidated subsidiaries, (5) the value of expected asset sales and (6) the amounts of other restructuring costs, including those related to Delphi. Financial projections are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these financial projections will not be accurate. Accordingly, we expect that our actual financial condition and results of operations will differ, perhaps, materially, from what we describe in our Viability Plan. Consequently, there can be no assurance the results or developments predicted by our Viability Plan will occur, or, even if they do occur, that they will have the anticipated effects on us and our subsidiaries or our business or operations. The failure of any such results or developments to materialize as anticipated could materially adversely affect the successful execution of our Viability Plan and our ability to continue as a going concern.”

Now…from a group of managers who have dramatically mismanaged the company to date shareholders are now being informed that financial projections are “speculative” and likely that “one or more of the assumptions” won’t turn out to be accurate at all.

We are talking about billions of taxpayer revenues that the governments in North America are considering placing in the hands of current management with the perceived trust they actually know what to do with it. I’m all for saving jobs, but not if the cost won’t significantly make a difference in the sustainable development of our economy. We would be better to support the retraining of automotive employees for other jobs such as trades than to simply inject capital into a company already running a deficit nearly double the assistance they require.

Disclosure: I own shares in Coca-Cola (KO)

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{ 1 comment… add one }
  • Anonymous March 9, 2009, 3:27 pm

    When i was growing up,the biggest company I knew of was GENERAL MOTORS. I was for the first auto bailout. I am not so sure now,though. it is pretty scary.That is,thinking an awesome General Motors could fail. Earl Email:ecgrandstaff@yahoo.com

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