GM Target Price Downgraded to $0.00/Worthless

[mkrishnan]

Rather than Chapter 11, don't you think it's more likely that if the bail outs don't happen GM will likely sell off its assets to a competitor (I'm guessing a foreign one) who probably has a better chance of making those assets useful than GM itself has?

GM's assets are largely valueless to any such entity...

- At the current point in the game, they don't have a lot of technology that another automaker would need, although they probably do have bits of valuable IP here and there (particularly in electric vehicles).

- Their brownfields are worse than useless. No sensible outsider would want them. No American company would want them either. Whether it were a US carmaker like Ford, a transplant like Toyota or Hyundai, or a maker that doesn't sell cars here today (like Tata), they'd be better off with a greenfield.

And none of the transplants are critically undercapacitized, especially not in a global, long-term sense.

Any third party motivated primarily by revenue / profit growth (as opposed to any kind of civic obligation or love for GM) would be better off just growing their own business opportunistically -- the ROI on the customers they steal from the sinking GM ship would be so much better than the ROI on taking GM assets over in order to get a larger share of those customers.

 

[IJ Reilly]

The primary purpose of Chapter 11 is to put creditors on hold. As pointed out earlier, GM is profitable and growing outside of the US. So I suspect Chapter 11, government rescue or otherwise, GM is going to be selling some assets to other car companies, probably at fire-sale prices. I don't see how they can escape this. Same goes for Ford. GM also has extensive real estate holdings in the US, some of which no doubt will be marketed to raise cash, no matter what else happens.

 

[Unspeaked]

The primary purpose of Chapter 11 is to put creditors on hold. As pointed out earlier, GM is profitable and growing outside of the US. So I suspect Chapter 11, government rescue or otherwise, GM is going to be selling some assets to other car companies, probably at fire-sale prices. I don't see how they can escape this. Same goes for Ford. GM also has extensive real estate holdings in the US, some of which no doubt will be marketed to raise cash, no matter what else happens.

That's more along the lines of what I thought.

Wouldn't the chance of getting the profitable overseas business, IP rights for their work with electric cars and vast property in the hands of people who'll do something more productive with it be more beneficial (in the long term) than trying to bail them out?

 

[IJ Reilly]

That's more along the lines of what I thought.

Wouldn't the chance of getting the profitable overseas business, IP rights for their work with electric cars and vast property in the hands of people who'll do something more productive with it be more beneficial (in the long term) than trying to bail them out?

As a point of order, I have to object to the use of the term "bailout." They aren't getting cash grants. If they get anything, it will be loans in which the government has a senior position. Like this approach or not, it's less of a "bailout" than if the government gave the companies huge investment tax credits.

GM will almost certainly have to shed some its assets, but it doesn't necessarily follow that it's better for them to go under in the process, and it also doesn't necessarily follow that the buyers will use them more productively. If you consider the number of bank mergers we've seen over the past ten years, I think it's awfully tough to argue that the new superbanks which were created are more productive than their former component parts.

 

[Unspeaked]

As a point of order, I have to object to the use of the term "bailout." They aren't getting cash grants. If they get anything, it will be loans in which the government has a senior position. Like this approach or not, it's less of a "bailout" than if the government gave the companies huge investment tax credits.

GM will almost certainly have to shed some its assets, but it doesn't necessarily follow that it's better for them to go under in the process, and it also doesn't necessarily follow that the buyers will use them more productively. If you consider the number of bank mergers we've seen over the past ten years, I think it's awfully tough to argue that the new superbanks which were created are more productive than their former component parts.

I agree with you about the use of "bailouts" but since that's the generic term that's been used by the media for this, I figure it's clearer and more consistent to refer to the loans this way.

I also get what you're saying about GM not having to go under, but if all that happens is it comes out of this process with a government loan and its most desirable assets sold off, what's the point of even continuing operations?

 

[takao]

The primary purpose of Chapter 11 is to put creditors on hold. As pointed out earlier, GM is profitable and growing outside of the US. So I suspect Chapter 11, government rescue or otherwise, GM is going to be selling some assets to other car companies, probably at fire-sale prices. I don't see how they can escape this. Same goes for Ford. GM also has extensive real estate holdings in the US, some of which no doubt will be marketed to raise cash, no matter what else happens.

the problem with selling assets is that nobody is going to buy the crappy, worthless assets with huge debt ... if the the situation will get more dire they might be forced to sell the better pieces just to keep the boat afloat (Opel, Daewoo sure will find some happy place and those are single handedresponsible for any growth outside of the US .. mainly because of the Daewoo -> chevrolet renaming)

 

[IJ Reilly]

I agree with you about the use of "bailouts" but since that's the generic term that's been used by the media for this, I figure it's clearer and more consistent to refer to the loans this way.

I also get what you're saying about GM not having to go under, but if all that happens is it comes out of this process with a government loan and its most desirable assets sold off, what's the point of even continuing operations?

It will depend on what's left over of course, if what remains is viable. It would be better for US economic interests if GM was not forced to divest themselves of all of their profitable subsidiaries, leaving over only an unprofitable shell company. That would clearly not be worth the effort.

I think they could also sell some of their extensive real estate holdings to raise cash.

the problem with selling assets is that nobody is going to buy the crappy, worthless assets with huge debt ... if the the situation will get more dire they might be forced to sell the better pieces just to keep the boat afloat (Opel, Daewoo sure will find some happy place and those are single handedresponsible for any growth outside of the US .. mainly because of the Daewoo -> chevrolet renaming)

I think you answered your own question. GM does have some valuable assets. The open question is whether they could sell some of these and end up with a viable company. I don't know the answer to that question. I doubt anyone does at this point.