Is the new GM viable?
Sunday night, a New York bankruptcy judge approved the sale of selected assets to "New GM." Assuming that bondholders and others don't appeal the judge's decision, the New GM could be born this Friday. As expected, it will consist of GM's most popular brands: Chevrolet, Cadillac, Buick, and GMC. But will the New GM be viable?
Before addressing this question, let's not forget the old GM, which includes the likes of Pontiac, Saab, Hummer and Saturn. With the help of $1.18 billion in taxpayer money, the old GM will try to sell itself to the highest bidder -- if any emerges. And the U.S. -- which will soon have put up a total of $50 billion -- will end up owning 61 percent of New GM; the UAW will get 17.5 percent; the Canadian government will take 11.7 percent; 10 percent will go to bondholders; and the common shareholders will be wiped out.The New GM could be viable. It all boils down to whether enough people will buy its cars. Already demand in the U.S. is way down: in 2007 16 million vehicles were sold and it looks like 2009 will be lucky to see 9.7 million in sales. GM's market share without those old GM brands is 16.4 percent. I am guessing that if GM can somehow gain market share and the overall market grows, then its odds of being viable improve.
On the positive side, the New GM will have lower costs because it has shed 21,000 union workers, closed 12 to 20 factories; and will shutter 40 percent of its 6,000 dealers. But it boils down to whether all this cost cutting will enable GM to actually make a profit on every car it sells.
I have not seen any financial projections for the New GM so there is no way for me to know whether it could be viable. But I am certain such projections exist somewhere and that they are based on many assumptions -- most of which were probably chosen to help persuade the U.S. to give GM $50 billion.
As I've posted, in order for the U.S. to get back its investment, the total market value of the New GM will need to be 20 percent above its previous all-time high. Repaying our investment is not the key test for viability but it would be nice if we got our money back.
In the next year, I think I would settle for a company that can pay its own bills.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.