Pre-packaged Bankruptcy Is GM's Only Option - Barron's

 |  Includes: F, GM, HMC, TM
by: SA Eli Hoffmann

Despite protestations from G.M.'s (NYSE:GM) brass, bankruptcy may indeed be its best option, Barron's says. The dying automaker would need $100B to survive through 2009 in its current form - a massive sum it's unlikely to see from Congress, which is wary of throwing money at what many see as a flawed business model.

Mind you, a traditional Chapter 11 filing could quickly slide into Chapter 7 bankruptcy if GM (or Chrysler or Ford (NYSE:F) a few months down the road) can't find anyone to lend them the money to keep operations running. That's why Barron's advocates a "pre-packaged bankruptcy" - in which a company enters bankruptcy protection with almost all of its financing in place - in this case backed by the government for a year or so. "In that time, and under the protection of the court, GM could begin to restructure its business with a much higher probability of long-term survival," Mark Bane, co-head of bankruptcy operations at the law firm of Ropes & Gray, says.

This would go a long way toward reassuring car buyers who might otherwise not want to purchase a vehicle from a bankrupt firm, for fear of not having warranties honored or parts being available - one of Detroit's arguments against Chapter 11. The plan needn't even be called a bankruptcy. Term it a financed reorganization, or whatever else might make it sound more palatable to GM's board.

Assuming they go down this road, what's the end of the story? To survive long-term, the Big Three will have to find a way to cut costs (duh), figure out how to make cars that Americans like, and shrink their bloated operations and dealer networks. Consider that U.S. automakers pay employees over $70/hour, compared with the $40/hour Toyota (NYSE:TM) and Honda (NYSE:HMC) pay their non-union employees.

GM would probably have to cut its 60K hourly-workers to about half of that, cut pay across the spectrum, close half of its plants, and wind down unprofitable brands (Saab, Pontiac, Hummer, GMC). Ford would have to say goodbye to Mercury. And Chrysler would likely have to close down everything except Jeep and its minivans - making it a likely takeover target for one of the other two, or a foreign carmaker.