GM chief running out of time and options

If Rick Wagoner, chairman and chief executive of General Motors, fails to get a merger deal, he could go down in history as the executive who presided over GM’s demise. (Rick Wilking/Reuters)

DETROIT: Rick Wagoner is running short of time and options to save General Motors and salvage his legacy as the leader of the biggest automaker in the world.

With GM burning through cash and auto sales sinking to historic lows, Wagoner is pushing hard for a merger with Chrysler – in talks first reported by The New York Times a week ago – after testing the waters for a similar deal with Ford Motor.

That Wagoner is even considering a merger with one of his crosstown rivals illustrates GM’s precarious state.

Wagoner, the company’s chief executive since 2000 and chairman since 2003, has not granted interviews since the Chrysler talks were revealed. But Wagoner and GM’s president, Frederick Henderson, are convinced that the automaker is in dire need of the cash, additional revenue and cost savings that a merger could provide, according to several people with knowledge of the talks.

The merger discussions, intended to be private, are gaining momentum as both sides want to reach an agreement within the next two to three weeks, according to people briefed on the discussions.

Financial institutions that hold Chrysler debt, including JPMorgan Chase and Goldman Sachs, are pressing Cerberus Capital Management, which owns Chrysler, to sell the automaker, these people said.

In recent weeks, the credit crisis and weak economy have driven U.S. auto sales to their lowest levels in 15 years, and ratcheted up pressure on Wagoner. GM’s shares sank below $5 this past week, as analysts projected that the automaker could exhaust its cash reserves – $21 billion at the end of the second quarter – by early next year and possibly be pushed into filing for bankruptcy.

The price of GM’s most actively traded bond Thursday stood at 22 cents on the dollar, a sign of investors’ skepticism about the company’s prospects in the near future.

GM has responded in recent months by announcing sharp cuts to its North American vehicle production that it said would bolster its cash position by $10 billion through cost cuts. It also hopes to raise $5 billion by selling assets like its Hummer brand.

Its shares rebounded on news of the Chrysler discussions, closing at $6.40 on Thursday, up 2.9 percent. But that has hardly alleviated the gloom hanging over GM and the rest of Detroit.

“This is the worst that GM has looked in nearly 50 years,” said David Healy, an analyst at Burnham Securities. “If auto sales stay at this level, they can’t survive for very long.”

GM posted a loss of $18.8 billion for the first half of this year. Healy projects that GM will lose $2.9 billion during the third quarter, not including special charges, and that its revenue will decline about 12 percent, to $38.5 billion.

Making matters worse is that GM is burning through more than $1 billion in cash each month, according to analyst estimates – with no end in sight.

“Macroeconomic factors could overwhelm them at some point,” said Robert Schulz, lead auto analyst at the credit-rating agency Standard & Poor’s.

For Wagoner – an analytical executive and former Duke University basketball player who joined General Motors straight out of Harvard Business School – the deepening crisis threatens to torpedo a methodical turnaround plan that appeared promising when he started it three years ago.

Since 2005, GM has cut $9 billion in structural costs and reduced its worldwide employment levels 18 percent, to 266,000 workers.

The cuts have been even broader in its core North American operations, where GM has reduced its number of employees by about 30 percent, and downsized its annual production by 800,000 vehicles. Its market share on the continent has been falling for years, down to 22.4 percent in September.

Wagoner also earned credit for negotiating a new contract last year with the United Auto Workers union that reduced wages for new hires and created a trust to administer health care costs for retirees.

But shrinking GM has not been enough to counteract rising gasoline prices on truck and SUV sales, and tightening lending standards for people who want to buy new vehicles.

“This has been a period of unprecedented chaos in the auto market,” said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan. “It’s not just GM. It’s Ford and Chrysler and everybody else.”

GM needs the $11 billion in cash that is currently on Chrysler’s books, and Cerberus is said to be considering a large investment in GM stock should the deal get done.

But merging with Chrysler – whose U.S. sales have fallen 25 percent this year – would carry far-reaching risks for GM.

To get Chrysler’s cash and revenue, Wagoner would be trying to meld two organizations with overlapping brands and products.

In addition, he would have to drastically reduce Chrysler’s manufacturing capacity and employment, and absorb billions of dollars of its outstanding debt.

The possibility of a merger is still considered 50-50, according to people briefed on the talks. Cerberus is said to be considering other possible partners for Chrysler, including the alliance of Nissan Motor of Japan and the French carmaker Renault (the two companies develop vehicles together and hold cross-ownership stakes).

Wagoner had an opportunity to acquire Chrysler in 2006 before it was put up for auction by its owner at the time, the German automaker Daimler.

But Wagoner showed minimal interest then. Last year, he rejected a chance for GM to join the Nissan-Renault alliance, vowing that GM could turn around its business on its own.

Adding Chrysler and its cash hoard could give GM some breathing room until the auto market recovers. “In this case, money is time,” Healy said.

Nick Bunkley contributed reporting.

By Bill Vlasic
Friday, October 17, 2008

Source: IHT

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