GM goes for broke
As part of new plan, taxpayers and unions would own majority of
automaker. Company unveils more cuts in jobs and dealers in bid to avoid
By Chris Isidore, CNNMoney.com senior writer
Last Updated: April 27, 2009: 11:15 AM ET
NEW YORK (CNNMoney.com) -- General Motors announced plans Monday to cut
23,000 U.S. jobs by 2011, drop its storied Pontiac brand and slash 40%
of its dealer network in its latest bid to stay out of bankruptcy.
The new restructuring proposal will leave the Treasury Department, and
thus U.S. taxpayers, owning a significant stake in GM. Treasury would
accept GM stock, rather than cash, for repayment of about $10 billion
that the government has already lent to GM.
Trust funds controlled by the United Auto Workers union would also hold
a significant stake in the company. Between them, Treasury and the
unions would own 89% of GM.
GM also announced an offer to its bondholders to swap $24 billion of the
company's $27 billion in unsecured debt for stock. GM is offering
bondholders 225 shares of its stock for every $1,000 it owes the
bondholders in principal.
GM CEO Fritz Henderson warned in a press conference Monday that a
bankruptcy is still very likely unless bondholders agree to the swap.
"It's not impossible but it's a tough task," Henderson said about the
company's ability to get enough bondholders to accept the company's
stock. "That's why I think [bankruptcy] is more probable."
The moves are GM's latest efforts to cut costs and stem losses that have
dogged its North American auto operations since 2005. But Monday's
restructuring announcement goes much further than the viability plan GM
unveiled to President Obama's auto industry task force in February.
The company had announced many of the job cuts in February, but Monday's
news that GM would have about 38,000 hourly U.S. employees by 2011
represents an additional reduction of 7,000 to 8,000 jobs beyond what GM
disclosed in its previous viability plan.
The job cuts come as GM is set to announce the closing of more plants in
the next few weeks. Henderson would not comment on which plants could be
on the chopping block.
The company said its goal is to cut costs to the level where GM can
break even even with industrywide U.S. sales of only 10 million
vehicles, rather than the 11.5 million to 12 million sales range that
had been its previous break-even target. Henderson added he's hoping
that the company could be profitable as soon as 2010 under the new
While the cuts will leave GM a much smaller company, Henderson said this
does not concern him. He admitted that results at GM have not been
acceptable for quite some time.
"I'm much more focused on getting results than being big," he said.
GM also confirmed reports that surfaced Friday and officially announced
plans to drop its Pontiac brand altogether. In its earlier restructuring
plan, GM had signaled that Pontiac would survive, albeit as a niche
The company also said it would make more cuts to its dealership network
than it announced in February, and at a much faster pace. GM said Monday
it will cut the number of its dealers by 42% to 3,605 by 2010, up from
its original plan to reduce its network to 4,100 dealers by 2014.
Bankruptcy still possible
The Obama administration's task force, which found that GM's February
turnaround plan was not viable, said Monday that the new plan "reflects
the work GM has done since March 30 to chart a new path to financial
viability." But the task force added that it "has made no final decision
regarding the treatment of its current loan to GM or with respect to any
future investments in the company."
The administration has given GM only until the end of May to reach deals
with creditors and unions to cut costs or be forced into bankruptcy. But
the Treasury Department did extended GM an additional $2 billion in
loans last week, bringing its total federal assistance to $15.4 billion.
Even before it reaches the government's May 31 deadline to reach an
agreement with bondholders and unions, GM will need additional loans
from the Treasury in order to continue to pay its bills, Henderson said
Details of those loans have not yet been worked out. The company has
said it could need as much as $30 billion in federal help to weather its
current financial crisis, and Henderson said Monday that request should
still be sufficient.
The United Auto Workers union and the ad hoc committee of bondholders
were not available for immediate comment on Monday's announcements.
GM will still need to convince bondholders to take the deal and win
further labor concessions from the union if it is to stay out of
bankruptcy. The union announced a tentative deal with Chrysler LLC late
Sunday in an effort to help that company meet an April 30 deadline to
avoid its own bankruptcy filing.
If the GM bondholders take the offer, they will end up owning about 10%
of GM. But they will be accepting stock worth only $380, based on
Friday's closing price, for every $1,000 they are now owed on the bonds.
By accepting the offer, bondholders would be betting that the company's
stock would rise in the future, and that the alternative of bankruptcy
could result in them getting even a smaller percentage of what they are
But taking the deal will still be risky. Even unsecured bondholders can
hope to be paid something back on their bonds if the company is forced
into bankruptcy at some point in the future, while stockholders are
likely to be wiped out altogether.
If all parties agree to the new restructuring plan and bankruptcy is
avoided, current shareholders will be left owning as little as 1% of
GM's outstanding shares.
Still, shares of GM (GM, Fortune 500), a component of the Dow Jones
industrial average, gained more than 30% in late morning trading due to
hopes that the company may now be able to stay out of bankruptcy.
GM press release on updated plan