Remnants of 'Old GM' to Linger

Remnants of 'Old GM' to Linger

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The Obama administration bills General Motors Corp.'s imminent bankruptcy as a fresh start for an American icon, saying it will unleash a lean competitor from court protection by summer's end.

But the remnants of GM left behind pose financial and operational quandaries that could prove an ongoing drain on both taxpayers and the revitalized GM.

The proposed plan will cleave apart one of the country's oldest and largest companies into, in effect, a "New GM" and "Old GM," evoking the historic breakup of AT&T Corp. in 1984 into long-distance and local-phone companies. As with the dismantling of Ma Bell, GM will have to meticulously apportion every line-item of revenue and expenses to the two companies, be it employee salaries or the cost of a new wrench. The GM Bankruptcy

  • New Era in Autos as GM Set for Bankruptcy * Potential Conflicts Abound in U.S.'s Role * Filing Could Lift Economy in Long Term * Shared Stress to Ripple Through Auto Business * Video: GM's History | Preparing for Bankruptcy * Complete Coverage: WSJ.com/Detroit

Breaking up GM represents a "very complex and time-consuming series of issues, plant by plant, and jurisdiction by jurisdiction," said Richard Chesley, a partner in the global bankruptcy and restructuring group at Paul, Hastings, Janofsky & Walker LLP, which isn't involved with the GM case. "It's not going to be easy to accomplish."

The breakup also could trigger unexpected struggles among New GM, Old GM and creditors, who could fight over the best way to allocate expenses between the two in a way that maximizes creditor recovery.

Old GM -- the actual name to be used for the company couldn't be learned

-- also would become a parts and service-provider to New GM on an interim basis, which raises the potential for clashes over pricing and contracts, say bankruptcy advisers.

On Monday, as part of its bankruptcy filing, GM is expected to name turnaround executive Al Koch as its new chief restructuring officer to guide the auto maker's trip through Chapter 11 and to run Old GM, said people familiar with the matter.

Mr. Koch, who oversaw Kmart's restructuring, will report to GM Chief Executive Frederick "Fritz" Henderson but also will report directly to the company's board. Assuming a New GM emerges from Chapter 11, Mr. Koch will then sit atop a new, separate management team winding down Old GM. In this role, he likely will report directly to Old GM's board, which will be different from the New GM board.

Old GM will be a sizable company itself, controlling 15 to 20 unwanted car plants containing tens of millions of square feet. It will have four vehicle brands that it plans to phase out -- Hummer, Saab, Pontiac and Saturn -- that last year sold about 500,000 cars and trucks in the U.S.

-- more than Korea's Hyundai Motor Co. or Germany's Volkswagen AG. (Over the weekend GM was closing in on a sale of Hummer to an undisclosed suitor, said people familiar with the matter.) [badco]

The administration plans to spend north of $30 billion to fund GM's bankruptcy, with the Canadian government loaning $9.5 billion, senior administration officials said. Plans call for Old GM to receive hundreds of millions of dollars and a debtor-in-possession loan, said people familiar with the matter, to fund the liquidation and the contractors who will manage it.

While the Obama administration hopes New GM will emerge from bankruptcy in as little as three months, it could take Old GM at least two years -- and up to 10 years -- to disappear, say people involved in the case. Just closing a factory, for instance, can take up to a year, while moving the massive machinery used to stamp out car-body parts requires special skills.

How quickly GM can strike deals to unload assets could prove critical, given the potential need for ongoing bankruptcy financing. GM has spent months in discussions with suitors for Saturn, Saab and Hummer. It plans to phase out Pontiac, all under a directive from the Obama administration to slash its number of brands. If things don't go according to plan, Old GM could require more money to operate until its parts are liquidated.

"You would like to have as much of this process in place as you can going in, so you can effectively get these assets marketed as quickly as you can and minimize the cash burn necessary to prop up these noncore businesses," Mr. Chesley said.

Another critical element of the split will be a "transition services agreement" that manages how much New GM and Old GM will pay for certain employees, services and parts.

Within a few months there will be about eight factories owned by Old GM, some of which will be run by New GM on an interim basis to make parts such as engine components for New GM; later, the plants will be closed or sold. This means Old GM could be subject to all the traditional complications that can come between a supplier and customer.

"There will be complaints quickly from creditors at Old GM that they are paying too much for engineering or accounting from New GM or that New GM is not paying Old GM enough for parts," said one lawyer involved in the GM matter.

Any conflicts will be a delicate matter for both companies. The creditors' stake in New GM will technically sit inside the Old GM estate until it finishes reorganizing, said a senior administration official. That gives the Old GM creditors incentive to help New GM succeed.

The New GM would likely leave its more onerous liabilities with the Old GM, including some dealer-franchise disputes, product-liability claims and environmental claims. GM has about $280 million in environmental claims, according to its first-quarter government filing. But the New GM might be forced to keep some environmental liabilities if, say, certain factories have already been subject to government clean-up orders.

The U.S. approved splitting the company at an early April meeting with GM's bankruptcy lawyers. Originally, the company contemplated a traditional filing, which would have placed all of GM into a reorganization plan requiring creditor approval.

But Matthew Feldman, a bankruptcy lawyer for the Obama auto task force, said a traditional bankruptcy would take too long and "just wouldn't work here," said people in the meeting.

In some respects, the plan to divide GM into "new" and "old" companies mirrors practices that have been used in Chapter 11 for years. Bankrupt companies often try to shed noncore assets and liabilities and emerge as new, healthier firms, or sell their best assets to various bidders to recover value for creditors.

But they don't always lead to trouble-free restructurings. In September, Lehman Brothers Holdings Inc. quickly sold its brokerage and investment banking businesses to the U.K.-based Barclays PLC, while Japan's Nomura Holdings Inc. nabbed Lehman's Asian operations and certain other businesses.

Eight months after the sale, Lehman's U.S. estate is picking a court fight with Barlcays, alleging in a filing it didn't get enough value in the shotgun sale days after Lehman's collapse.

Reply to
Jim Higgins
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The idea is to leave all the bills.

Once the new GM starts off, they will start borrowing again and do it again.

I wouldn't touch noew or old GM paper. Toxic waste.

Reply to
Canuck57

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