Today GM presented its case for a taxpayer funded bailout (see GM Asks for $18 Billion). While GM’s plan of action comes close to addressing the concerns that plague GM, I am not certain that it goes far enough.

Last week I detailed what I thought it would take to right GM (see Pre-packaged Bankruptcy Unlikely). I wrote:

I have been adamant that whatever aid the taxpayer provides comes with properly structured terms, with properly structured incentives, and at a hefty price to current shareholders, creditors, and management.

In particular, in the case of GM, conditions for the receipt of aid could include:

1. The ousting of current top management
2. A moratorium on mergers and acquisitions
3. A renegotiation of employment terms with the UAW, …with all options on the table
4. The rationalization of brands – for GM my suggestion would be to keep only Chevrolet, Cadillac, Opel, and potentially, Buick (given its standing in the China market)
5. A shutdown of all plants tied to brands that GM will no longer manufacture, and a consolidation of the remaining brands into a few, select plants
6. Incentives (in the form of tax credits) to produce smaller, more fuel-efficient automobiles

Although these terms seem fairly onerous, such terms (or variants thereof) provide the only reasonable chance left to derive some value from GM.

Although GM’s plan does not go as far as that which I proffered, I have to admit that it represents a step in the right direction. As reported by the New York Times:

G.M., the world’s largest automaker for decades, said Tuesday that it was in such dire straits that it would deeply cut jobs, factories, brands and executive pay as part of its plea to get $12 billion in federal loans and an additional $6 billion line of credit.

To get the loans, G.M. is taking an ax to its money-losing North American operations from top to bottom.

G.M. said it planned to focus on four core brands — Chevrolet, Cadillac, Buick and GMC — and either sell, eliminate or consolidate the Saturn, Saab, Hummer and Pontiac brands.

Despite having radically downsized its operations in the last three years, G.M. said it would cut another 20 percent of its factories and jobs, seek to renegotiate the terms of $66 billion in debt, and push to reopen contract talks with the United Auto Workers to reduce labor costs.

The cutbacks will extend into the executive ranks as well. G.M.’s chairman, Mr. Wagoner, and its board members will reduce their compensation to $1 in 2009.

The company said it would sell its Hummer and Saab brands, shrink its Pontiac brand into a specialty, niche-vehicle division, and explore opportunities to sell, close or consolidate the Saturn brand…

G.M. said it planned to reduce the number of salaried and hourly workers in the United States to 65,000 to 75,000 by 2012 from the current 96,000. The company also said it would reduce its number of factories to 36 from 47.As it moves to shrink its operations, G.M. is setting up tough negotiations ahead with its debtholders and the United Auto Workers union.

Mr. Henderson said that G.M. would try to negotiate a reduction in its debt to about $35 billion from $66 billion. While he would not go into specifics, the company is expected to ask bondholders to take equity in exchange for reducing their payout on long-term bonds.

G.M. will also seek to cut its labor costs by re-opening its contract with the U.A.W. Crucial targets for cost cuts in the contract include eliminating the so-called “jobs bank” that pays idled workers when their plants close, and other job security provisions.

My proposal, and GM’s offer, differ in a few key areas.

GM has proposed to keep the GMC brand, presumably to preserve its line of light trucks. That I can understand. However, it is my opinion that Saturn and Pontiac should not be rolled into other brands or become niche products. They should be eliminated!

GM has also agreed to reduce the number of factories from 46 to 37. That is not nearly enough. The target number should be closer to 30 than 40. In addition to plant closures, GM suggested that it would reduce headcount by 20,000-30,000, …but only sometime within the next 4 years. They need to be more aggressive on that end. In my opninion, they should shed 20,000-30,000 in staff by 2010 (the latest), and aim for a total reduction of 40,000 by 2011.

With respect to the UAW contracts, the details that I saw addressed the “job banks” program. The union needs to get realistic. If it thinks it can get through this episode with the “job banks” program as its only concession, it is deluding itself. All options need to be on the table including health benefits and hourly wage rates for current (and not just future) GM-UAW employees.

And while I appreciate the “symbolic” gesture of Mr. Wagoner to accept $1 in remuneration for his services, I see no reason why he, Bob Lutz, and the rest of the executive team should remain in place. Should we trust them to engineer a successful restructuring of GM when they had been unable to do so on several previous attempts? It’s high time that management move on.

Finally, there is the issue of taxpayer protection. I saw nothing detailing how the taxpayers would be protected should they provide funding. I would like to see GM be more forthcoming about the precise terms (deal structure) it is willing to accept in exchange for this $18 Billion capital infusion.

But to be fair, for all the derision leveled at GM over the past several months, this offer was not half bad. We’re now just waiting for the other half, …which will come only at the insistence of the taxpayer.

This entry was posted on Tuesday, December 2nd, 2008 at 9:40 pm and is filed under Bankruptcies, Corporate Strategy, Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.