I received an e-mail message yesterday from the folks at Weber Shandwick (GM’s PR firm) calling my attention to a recent blog post by Tom Wilkinson, GM’s news relations director (see Why Not Bankruptcy?).

In that post, Mr. Wilkinson objects to those who have called for bankruptcy reorganization as a viable option for GM. He writes:

Let me briefly review why we think a tough out-of-court reorganization is best for GM, the taxpayers, and other stakeholders.

Bankruptcy reorganization takes cash – lots of it. For a company like General Motors to operate in Chapter 11, it would need massive debtor-in-possession loans. With credit markets frozen, there is realistically only one source of such loans – the federal government. We estimate loans needed to reorganize GM in Chapter 11 could top $100 billion, far more than the out-of-court fix envisioned in our restructuring plan.

MY COMMENT: OK, what’s the problem with that? So the government becomes the de facto DIP financier. And perhaps it is to the tune of $100B (although I think that might be a bit overstated). But that money does not fall down a sinkhole. It is a loan that is collateralized by GM’s enterprise, whatever the value of that may be. The real question is not whether the federal government would have to pony up $100B now if it forced GM into bankruptcy. The government could easily reach (if not exceed) that amount under the current arrangement, only in $10-20B increments.

The real question is whether a GM turnaround would result more quickly, efficiently, and effectively via bankruptcy; whether GM emerges as a healthier organization after bankruptcy; and, whether the likelihood of the federal government getting paid back is higher as a result.

I am not necessarily opposed to additional out-of-court aid for GM, provided that it come with extremely strict terms. However, in many ways, bankruptcy allows GM greater flexibility to reorganize (see GM Plan, Pre-Packaged Bankruptcy, and Preventing Moral Hazard for details).

Mr. Wilkinson continues:

One reason this [$100B DIP financing] figure is so large is that GM’s revenues would plunge in bankruptcy. I ask: “Would [customers] buy a car or truck from a company in bankruptcy, when there are similar products available at another dealership right down the block?” I expect that if they were honest, they would answer “Probably not.” So why do they expect other shoppers to behave differently? The GM viability plan includes a detailed analysis of this revenue risk (Appendix L, Exhibit 3), an analysis bankruptcy advocates seem eager to dismiss or ignore.

MY COMMENT: I am not so sure the answer to Mr. Wilkinson’s question is “no”, or even “probably not”. And this is where I take some issue with the GM plan.

GM assumes that post-bankruptcy revenues for their products will fall by around 35%-40% (compared with the non-bankruptcy alternative). They use Daewoo’s experience as a benchmark. They also try to gauge potential consumer demand via survey instrument.

I am not sure that Daewoo is the right benchmark. Moreover, I am skeptical of the surveys. The fact is that a GM bankruptcy would be very different from a “traditional” bankruptcy. As Mr. Wilkinson points out, in the case of GM, the federal government will act as the DIP financier. With the federal government as the DIP financier, GM not only has the explicit backing of the US government, but the implicit guarantee that it shall continue as a going concern. Moreover, the federal government can stand behind GM warranties. Those stylized facts alone are enough to diminish consumer flight.

It’s no surprise that GM management is strongly advocating an out-of-court solution. After all, an out-of-court solution maximizes their chances of continued employment with GM.

With respect to GM’s position on the matter, the insight of Milgrom and Roberts (RAND, 1986) rings true: Beware (and be skeptical) of information provided by interested parties.

So, YES, GM could survive bankruptcy, and we needn’t be frightened by the prospects, …no matter how much GM tries to convince us that it would spell the apocalypse.

This entry was posted on Wednesday, March 4th, 2009 at 10:04 pm and is filed under Bankruptcies, Corporate Strategy, Economy, Humor. 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.