'Government' Motors or Ford: Which Automaker Will Remain Viable? 43 comments
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With General Motors (GM) trading at approximately $1, it is more apparent that a restructuring deal is necessary and imminent. There are currently two parties involved in the negotiations with the U.S. Government / UAW Retired Workers on one side and individual / institutional investors on the other. The major discrepancy is who will have control of the company in the future and who will get paid off as a result of GM’s delinquencies.
Under the current deal set out by the Obama administration, the government would control 50% of the company, 39% would be controlled by the UAW, 10% by the bondholders and the remaining 1% for existing shareholders. Current shareholders and bondholders are not exactly ecstatic about this current deal and are working to structure another negotiation out of bankruptcy
court.
If however this deal were to go down, the American taxpayers would be a majority stake holder in General Motors, which in the future may be more appropriately referred to as “Government Motors.” Ford (F) will more than likely have a difficult time competing against a government owned GM. With the government taking control, it is likely that they will do whatever they can in their power to revive GM no matter how much money it takes. The U.S. government has had no problem spending money now with the hopes the market will recover eventually. Paying for the trillions of dollars spent today will be a subject of interest for tax payers in the near future.
Ford, in a similar move to Capital One (COF) and many other financials, has opted to raise capital through the dilution of shares.
Just last week it sold 300 million shares of stock at a price of $4.75 per share. Originally, they had been looking for more like $6.00, but the markets did not agree that was reasonable. Ultimately, the dilution of shares reduces shareholder value and earnings per share (EPS). That is of course if there are positive earnings per share to be distributed. If EPS is negative, it spreads the loss out to more shares which may make the loss look “less bad.” This is of course how we now have to compare things in a world filled with financial failure. “Less Bad” is now the new “Pretty Good.”
What is the money going to be used for? Ford has explained that it will fund retirees health care program, but seems more than likely that additional capital will be needed to stay competitive after that is exhausted as car sales have dropped off the economic cliff as the chart below illustrates.
(Click to Enlarge)
From here on in, Ford could literally be up against a giant if the government were to take control of GM. We foresee this as a major problem for them as the other two major domestic automakers (GM, Chrysler) will more than likely have a clean debt slate post bankruptcy with the addition of government backing. Demand will need to increase dramatically for domestic cars in the near future in order for Ford to stay viable all things considered.
Think about this: If the government owns a majority stake in GM, which company will get the most favorable treatment when it comes to government contracts, loans and exports?
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We won't be able to buy a Chrysler product without driving 40 miles. GM will be 30 miles. Ford will still be around the corner. Without Saturn nearby, which we bought 4 of them since 1991 for the various family members, we will switch to Ford products-Fusion Hybrid, Escape Hybrid will be our next two cars in the next 3 years. My son just bought a Honda Civic, made in Ohio, since Saturn will no longer be around.
I suspect the 'cut/closed' Chrysler/GM dealers will end up selling Kia/Hyundai/Honda/some foreign brand.
I wish Chrysler and GM the best, but with no dealers to sell cars locally, It's hard to see how they will stay in business.
1) If GM has no real value, then it should be liquidated and its assets distributed as such process dictates. There will be arguing, but this is simple law.
2) If GM has ongoing value, then it should be broken-up or reorganized to leverage that value. The long-term management at GM was simply not doing enough over the last 10+ years to avoid this issue. They were driving all-of GM to solution #1.
3) All of GM's costs need to be redone with the surviving parts from #2. This includes farmed-out costs and internal costs.
4) I dislike government intervention. We need a solution to re-liquidating the taxpayer investment on a reasonable timetable. It is a shame that shareholder investment won't hold out as well, but the shareholders should have removed GM's management long before this. If the government cannot get GM working, then they will certainly be removed, as well.
Many taxpayers are wondering why are we keeping these dinosaurs on life support?
The govt's HIDDEN justification for bailing out Detroit: Detroit has been struggling for decades with high labor, health care and pension costs. Detroit's pensions are grossly underfunded. Should the automakers fail, the US government and will be on the hook for billions to pay the lavish pensions and retirement health care benefits of the autoworker.
The big problem will be convincing the American who was just let go from his minimum wage paying job at Best Buy, (retail workers are 10% of the american workforce) to support the bailout plan, by convincing the average american of the following:
a. Why It is better to rescue a UAW workers job ($70 per hour in total costs, appx $34 per hour in wages), rather than a retail-workers job.
b. Why it is better for the government to support the lavish pensions of the UAW worker (when the average american chump has no pension and has just seen his 401K plummet by 30+ percent)
c. Why it is better for the american government to pay for the lavish health care benefits of UAW workers and retirees (when 25% of americans have NO health insurance.
It seems that the government has done good job of hoodwinking us that bailing out detroit is "good for america"
On May 17 08:37 AM valuestocksonly wrote:
> GM is damaged goods. The government cannot save the negative perception
> of GM. The chinese built cars they will be importing will be a flop.
> Ford will thrive because of the negativity surrounding GM. Pro-American
> bias is on the rise and will fuel Ford.
You cannot change and makeup laws as you go.
There will be a revolt in this country if anyone thinks they can........
He has, thats why GM and Chrys are going Chap 11. I love all the people on here that think its some Al Gore/Obama Demoncratic conspiracy to take away your beloved Suburbans and Corvettes.
Gm sucks, Chrys sucks, I've owned both in the past. They both suck and have sucked for a long time. Overpaid undereducated fat asses making cars that suck for decades = failure. Why is that so hard to understand?
So, the existing share holders will get 1% of the company. OK. The company right now, which is fully owned by these equity holders are valuing it at I believe something like $700 Million. The restructuring is not final, but its almost sure, so there is some premium, so say, once it is final that current owners will get 1%, may be the equity will drop another 25%. That means, with the premium adjusted valuation, the restructured company is expected to be worth $60 Billion. That is a ridiculous valuation for post restructured GM.
On May 18 04:44 PM SouthernCEO wrote:
> I still love my Corvette. I don't like little, powerless, shoebox
> cars. Never have and never will. I drove a Prius and a Fit and
> a Smart. No thanks. I'm not sure I would drive one if it was free.
> Why not let the consumer decide what he wants? If someone wants
> a small car great if they want something bigger great. Why does
> anyone, especially the government care what I drive? The whole gas
> millage thing is a lie. The government collects billions in tax
> on gas. They may not want you to drive your car but they want you
> to buy all of the gas you can. So now we all drive little cars.
> Who pays the taxes then?
On May 18 09:49 AM Car Buyer wrote:
> How do you sell cars without dealers?
>
> We won't be able to buy a Chrysler product without driving 40 miles.
> GM will be 30 miles. Ford will still be around the corner. Without
> Saturn nearby, which we bought 4 of them since 1991 for the various
> family members, we will switch to Ford products-Fusion Hybrid, Escape
> Hybrid will be our next two cars in the next 3 years. My son just
> bought a Honda Civic, made in Ohio, since Saturn will no longer be
> around.
>
> I suspect the 'cut/closed' Chrysler/GM dealers will end up selling
> Kia/Hyundai/Honda/some foreign brand.
>
> I wish Chrysler and GM the best, but with no dealers to sell cars
> locally, It's hard to see how they will stay in business.
My guess is that Ford will end up being taken over as well. In fact, I imagine they'll likely be pushed into a "stress test" situation similar to what the banks went through. Uncle Sam will come up with a requirement for cash reserves to cover pensions, or somesuch, instantly making Ford "non-viable" and so a candidate for immediate gov't takeover. Afterwards, we'll all be buying foreign cars.
1. With respect of Ford competing with GM, Chrysler et. all, consider that GM management is going to be considerably distracted with trying to please a variety of “masters”. Competing in the automotive business demands vision, purpose and most of all products that the consumer is willing to buy. While the industry as a whole is down in the United States (yes this includes major losses at Toyota and Nissan), Ford is best positioned of the three “traditionally” American automakers to benefit from the eventual rebound. New and/or redesigned products just hitting the street as 2010 models (Fusion/Fusion Hybrid, Taurus/Taurus SHO) plus the fuel-thrifty European Fiesta will give Ford a rejuvenated product line as the consumers begin to re-enter the marketplace. A recent investment of $100 million USD in their Super Duty truck plant (in addition to the $100 million USD they spent to move full-size SUV production to Louisville) will assure Ford’s ability to provide commercial vehicles to those companies who have deferred purchases.
2. Ford’s position in the marketplace with respect to GM and Chrysler is not unlike American Airlines in the airline industry. While massive government loans have not been used to “bail-out” airline companies (the Fed response in the aftermath of 9-11 not withstanding), American competes against major competitors that have used bankruptcy court to reduce expenses, abandon routes and break contracts to lower their cost of operations. I think that government involvement in a specific corporation implies a complete failure of that business model, not so much a risk to the healthy companies that do not require such involvement.
3. Finally, on the issue of the UAW and their need for cash. It took the traditional American automakers and their major union years to figure out how to remove the millstone of legacy costs (i.e. retirement pensions and health care) from their balance sheets via the VEBA (voluntary employee benefit association) to be initially funded by the automakers and managed by the union. Problem is, the marketplace went south before the VEBA could be funded. The union wants the cash for the VEBA and the sooner those liabilities can be moved off the balance sheets of GM, Ford and Chrysler-Fiat to the union VEBA, the less likely they would be dumped on the taxpayer through the Pension Benefit Guaranty Corporation (PBGC). Common stock in an automaker accomplishes little toward this goal, since as part of the negotiations with the government for both GM and Chrysler the union had to take stock in lieu of the cash that was already assured via the last round of contract negotiations.
UAW = Unemployed American Workers.
With a college degree and four promotions in six years, I finally have attained to the base compensation package of a GM line laborer, in the biotech field. After a few more promotions, I may have the same retirement benefits. I consider myself fairly compensated. Insane, plain and simple.
Millions of unspoiled, desparate, hardworking people just about everywhere (even here) would die to work for a third of what these folks make. Sans benefits. This is not an argument, it is not a debate. This is an economic law as immutable as Newton's laws. Unions have attempted to re-create reality. The UAW has succeeded; soon, its reality will cease to exist.