Remnants of 'Old GM' to Linger
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
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.)
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
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
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.