GM moves to secure $15 billion cushion

Deep cuts, new financing needed to ensure liquidity, restore confidence in firm’s future

"Our plan is not a plan to survive," General Motors Corp. Chairman Rick Wagoner said Tuesday. "It is a plan to win."

Except that GM, beset by skyrocketing oil prices, slumping consumer confidence and a reliance on gas-guzzling pickups and SUVs that made business sense in different times, must ensure its hemorrhaging North American operations survive before the company can win. Stripped to the bare essentials, that’s what GM’s second restructuring announcement in six weeks is all about — surviving the here-and-now long enough to make it to the long term.

And that means finding more cash from within the company — at least $10 billion of the $15 billion it says it needs — because global credit markets are so stingy and GM’s ability to navigate difficult times is so suspect among the financial intelligentsia, however quasi-informed some of that suspicion may be.

It’s all about the cash, folks, as GM’s use of the words "monetize" and "liquidity" and "sell assets" and "financing activities" and "cumulative cash improvements" should tell you. A company without sufficient cash coursing through its operations and funding new products is a company running out of time or headed for bankruptcy or both.

Notice that GM is aiming to reduce the cash cost of its salaried work force in the United States and Canada by 20 percent, not a specific number of heads; that executive bonuses will be nixed, along with raises in base salaries; that retiree health care for those 65 and older will end, effective Jan. 1; that capital expenditures will be reduced and global product spending for this year and next will equal last year’s outlay; that the dividend will be suspended for the first time since the Great Depression.

GM is doing what it has to do to catch up with the tectonic shifts in the U.S. car market. At the same time, it is trying to make the case that a global automaker with $181 billion in annual sales and formidable positions in growth markets around the world is — and theoretically will be — worth more than the $5.65 billion it is valued by the American equity markets.

Building confidence is Job 1

The vast disparity between sales and market cap — rival Toyota Motor Corp. books more profit in the States in six months than GM’s outstanding equity is worth — tells you a) how financially insignificant GM is on Wall Street and b) how serious its predicament truly is and c) how likely it is that GM will need to seek more than its stated $3 billion or so from would-be lenders.

"They’re not pandering to Wall Street," says John Casesa, managing director of Casesa Shapiro Strategic Advisors in New York and a longtime analyst. "They’re trying to rebuild confidence so they can attract investment."

Or, put more crassly, GM is trying to demonstrate that it’s not a dead company walking in the country where its shares are traded and a vast amount of its debt is held. As successful as GM is proving to be offshore — sales in China are up 627 percent over the past five years and 7,048 percent in Russia — the General cannot be viable in its home market unless investors believe in management, their strategy and the automaker’s future.

"We want investors to have confidence we know what we’re doing," President Fritz Henderson says. So do thousands of employees, tens of thousands of retirees, the state of Michigan and the communities that depend on GM’s continued survival.

Oil prices driving behavior

There are no guarantees, as GM’s over-65 salaried retirees set to lose their company health care can attest. It’s jarring to hear Wagoner acknowledge that he and his team don’t know what the market will be like "three to six weeks from now," just like they didn’t know how quickly things would deteriorate when they announced a series of actions at the annual meeting in early June.

The simple truth is that GM and its rivals, foreign and domestic, are operating in an environment they largely cannot control because it is moving at a speed few anticipated. Instant information begets instant reaction from traders, regulators, politicians and consumers. Fear and disbelief trump deliberation and confidence, and oil prices seem to trump everything.

Congressional testimony Tuesday by Federal Reserve Chairman Ben Bernanke contributed to a nearly $7 drop in the price of a barrel of oil to $138.74, but recent gyrations could just as easily push the commodity back toward the $150 mark as down further. The point: Automakers are scrambling to prepare for the worst because hoping for a return to normalcy is not a strategy.

It’s a corporate death sentence. GM’s grim moves telegraph an admission that the dreaded analysts mostly have it right: GM needs more cash to survive and it must shrink to grow.

Although Wagoner & Co. made clear their intention to focus on driving the profitability of their seven U.S. brands, excluding Hummer, the door to killing one or more clearly remains open.

Chapter 11 in all but name

That’s not all. Assuming a Chapter 11 bankruptcy filing is the nuclear option interested parties want to avoid — management, unions, employees, suppliers and dealers — Tuesday’s moves are likely just the first steps of what essentially is shaping up to be a Chapter 11 reorganization without walking into a federal courtroom.

Could GM, faced with further market deterioration, decide to kill Saturn or Buick or euthanize Saab, as so many critics have been clamoring? Yes. Could it study the option of selling its sprawling Service Parts Operations or shopping transmission or stamping facilities for cash? Yes. Could GM, faced with heavier calls for cash, push United Auto Workers leaders to reopen their landmark deal creating a health care trust fund and negotiate a smaller contribution?

If it means avoiding federal bankruptcy court, the answer is yes because that’s what this excruciating exercise is all about.