General Motors (NYSE:GM) was an iconic American corporation before it filed for chapter 11 bankruptcy protection in 2009. At the time of bankruptcy, GM was 101 years old. One consequence of the bankruptcy proceeding was that the U.S. government owned 60% of GM after pumping in nearly $50 billion. Furthermore, the United Auto Workers union has a 17.5% stake in the new GM. The U.S. government sold the bulk of its holdings at $33 a share in 2010 and currently owns about 500 million shares or about 26%. At its current share price of around $22, the U.S. government would incur a loss of $15 billion.
The new General Motors is left with four brands: Chevrolet, Buick, GMC, and Cadillac. GM has shed its Pontiac, Saturn, Hummer, and Saab brands, and by 2009, it had planned, before courting bankruptcy, to cut 23,000 U.S. jobs and slash 40% of its dealerships. In addition, during bankruptcy, GM intended closing a dozen or so facilities. It also intended cutting back on health insurance cover for more than 650,000 retirees and their families although their pension funds remained unaffected.
Government loans, investment, and bankruptcy restructuring seemed to have buoyed investor confidence for at General Motor's initial public offering in late 2010, it raised $20 billion in an IPO of common and preferred shares. On the first day of trading, shares closed at $33.81.
It is in this context that any future prospects of GM ought to be analyzed. Before I delve into future prospects and current performance, it is imperative to understand why GM, a once iconic American corporation, was brought to bankruptcy. Once a few fundamental causes are identified, it, again becomes an imperative to ask if and how GM intends overcoming its past shortcomings.
In September 2010, GM's U.S. market share slipped to 18%, which was the third lowest ever recorded. In March 2010, GM had recorded a market share of 17.6%. In contrast, in 1950, GM made over 50% of all cars sold in the country. Further, both Ford (NYSE:F) and Toyota (NYSE:TM) strengthened their market shares to 16.3% and 15.6% respectively. Honda (NYSE:HMC) continued to maintain its share of 11% during the same period. However, just before the GM bankruptcy in 2009, March, 2008 saw auto sales decline for all four major auto companies in the U.S. - GM, Ford, Chrysler and Toyota. While Toyota experienced the least decline, the overall decrease in sales was generally attributed to rising fuel prices and a slumping trend in the overall economy.
It is also interesting to note that in 2008, while a downturn in sales was affecting all major players in the auto industry, only GM and privately held Chrysler were unable to remain financially viable without a loan from the federal government. Toward the end of 2008, President Bush had announced a $9.4 billion loan for GM and a $4 billion loan for Chrysler, both loans repayable in three years. Both automakers were asked to prove their viability by March 31, of the next year even though they were not expected to be profitable by then. Two important points stand out during this phase.
First, auto bailout legislation was shot down in the senate a week prior to the loans with Republican senators citing the United Auto Workers (UAW) Union's stiff resistance as the cause. Republican senators also demanded hard labor union concessions in exchange for the loans. Second, while the plants run by American automakers such as GM and Chrysler were staffed, exclusively, with members of the UAW; the plants of Asian automobile manufacturers such as Toyota & Honda were not.
The government, as part of the loan disbursal, wanted the UAW to accept wages and work rules competitive with those prevalent at non-unionized plants operated by the Asian manufacturers. Another, frequently cited reason for GM's bankruptcy is bad management practices including financial policies, uncompetitive vehicle models, ignoring competition, a failure to innovate, and a sycophantic management culture that rewarded promotions to 'yes' men instead to practitioners of successful business practices and genuine insight.
With these insights into the circumstances surrounding GM's bankruptcy, I now examine GM's performance post-IPO period to understand where the company is headed. The GM stock would need to rise to just under $49 for the government to break even on its investment. A comparison of market capitalization for each of the major auto manufacturers is shown below:
GM: $35 billion
Ford: $40 billion
Toyota: $244 billion
Honda: $60.38 billion
Volkswagen (OTCQX:VLKAY): $76.79 billion
Toyota, which has never received a bailout or a rescue loan from the U.S. government, tops the list.
Some aspects are in GM's favor. For one, a provision allows the company to hold onto $16 billion in operating loss credits to offset future taxation. GM also has the highest market share in the North American market and a strong presence in the BRIC countries where, again, the company has the highest market share combined.
For 2011, GM recorded a 13% increase in sales in the North American market and had the highest market share in China, with sales increasing by more than 8%. GM's corporate credit ratings have been increased to one notch below investment grade by both Moody's and Standard & Poor's. GM's net income to common stockholders, in 2011, was $7.6 billion as opposed to $4.7 billion in 2010 with profit margin in 2011 at 4.7%. In terms of dividends on common stock, GM has no immediate plans to pay any dividends, as it is restricted to unless it is able to meet all dividend obligations on its Series A and Series B stock. Its debt-to-equity ratio is 35 and total debt obligations equal $14.22 billion. A new 4-year agreement was signed in 2011 that offers workers $5,000 signing bonuses as well as the possibility of more lucrative profit-sharing checks. A $2 to $3 per hour pay raise for entry-level workers was also negotiated.
It is my recommendation that any long-term investment in GM be taken with caution. While GM has remained profitable over the past couple years, its serious problems with labor management and unions as well as managerial ineptness in the past, implies that GM would have to continue on a consistent path of profitability and innovation for more than a few years in order to truly establish itself as a long-term automotive player.
A company that has recently warded off bankruptcy, under more than charitable circumstances, is expected to be on its toes for the first few years. However, unless the root of its maladies are or have been successfully eradicated, I would expect similar endemic problems, as in the past, to resurface when the recent high of failure is replaced again with sloth and complacency until GM is brought back, yet again, to the brink.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.