GM plots a course for survival
Short on cash and facing bankruptcy rumors, General Motors Corp. said Tuesday that it would suspend its dividend, sell assets worth as much as $4 billion, borrow an additional $2 billion to $3 billion and lay off salaried workers, among other steps.
The struggling automaker said the actions, aimed to “align the business with current market conditions,” would raise as much as $15 billion by the end of next year, enough to ensure liquidity, the company said, even if the pace of vehicle sales slows further.
GM also said it expected to report a large loss in the second quarter, although it would not give specifics. In the first quarter, GM lost $3.3 billion, and for all of 2007 the automaker lost $38.7 billion. Its last full year of profitability was 2004, when it made $1.1 billion.
“No one would dispute that this is a pretty challenging time for the U.S. auto industry,” GM Chairman and Chief Executive Rick Wagoner said.
GM, arguably more than any other car company, has suffered from the results of a slowing economy and soaring gasoline prices. With a fleet heavy on fuel-guzzling sport utility vehicles and trucks, the Detroit giant has struggled to attract customers.
Through the first six months of the year, GM’s U.S. vehicle sales were down 16.1% compared with a year earlier. In the same time span, GM shares have fallen dramatically, to a 54-year low of $9.38 at market close Monday, down from $23.88 on Jan. 2.
On Tuesday, GM shares rose 46 cents to $9.84, a 5% increase.
Wagoner has repeatedly tried to dispel rumors of a bankruptcy, saying that such a filing was not an option. The company’s stock has fallen 87% since he took over leadership in 2000; the automaker is currently burning through cash at a rate of $1 billion a month.
GM said this spring that it had $24 billion in cash on hand, as well as $7 billion in available lines of credit, enough to get through 2008.
Hours after the automaker’s announcement Tuesday, credit rating firm Moody’s Investors Service said it was reviewing GM’s debt for a possible downgrade, citing liquidity as a primary concern.
Other carmakers have suffered as well. Truck-heavy Ford, with sales down 14% year to date, has seen its stock fall by nearly half. Toyota last week said it would significantly reduce truck production at its U.S. plants. Overall sales of cars and trucks in the U.S. are down 10.1% through June.
In recent months, GM has announced other cost-cutting moves and shifts in strategy, including halting redesigns of its largest SUVs, idling some plants and unveiling plans to close four truck factories.
Among a list of changes announced Tuesday, GM said its truck production would be reduced further and that it would cut its salaried workforce by an unspecified number, which could save the company $1.5 billion.
The automaker is also reducing marketing costs, curbing engineering expenditures and stopping healthcare benefits for salaried employees older than 65 starting next year. That last step would be partially offset, the company said, by a pension increase.
GM also will freeze salaries in 2008 and 2009, halt 2008 executive bonuses, delay $1.7 billion in payments to a pension fund for unionized workers and reduce inventories at dealerships in the U.S., Canada and Europe.
All those moves -- including the cessation of the 25-cent-per-share quarterly dividend, which GM said would save it $800 million through 2009 -- are expected to reduce expenditures by $10 billion.
At the same time, GM said it would seek to raise money by selling assets and borrowing money on capital markets. “We believe there is significant liquidity opportunity without the risk of hurting the company,” GM Chief Financial Officer Ray Young said.
Young said GM had retained two outside consultants to advise it on sales of assets. GM last month said it was considering the sale of its Hummer SUV brand. Speculation has been rampant that GM might sell other brands, including Saab and even Buick or Pontiac.
Young said asset sales could bring in $2 billion to $4 billion.
Additionally, GM said it has as much as $20 billion in unencumbered assets that could be used as collateral to raise an additional $2 billion to $3 billion in cash.
Many analysts, however, believe that the company cannot solve its problems simply by cutting costs, selling brands and leveraging assets. Their argument is that the only true path to profitability is by increasing sales in the crucial U.S. market.
“We continue to believe that GM’s plans are overly cost-oriented, and that they overlook many factors that threaten the company’s viability,” Credit Suisse analyst Rod Lache said in a research note Tuesday.
--
