Auctioning Detroit In Pieces: $50 Billion For GM (GM)

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GM (GM), Ford (F), and Chrysler managements are shuttling in and out of Washington trying to get both the people leaving and the people coming in to lend them $30 billion or $40 billion. Their argument is that the tremendous drop in domestic vehicle sales will put them out of business.

If one or all of The Big Three stops doing business, hundreds of thousands of jobs will be lost and the nation’s tax base will take a hit at a time when the Treasury cannot afford that. But, none of the US car companies is going to stop operating, even for a day.

The assumption that Detroit is trying to sell to Congress, the Fed, and Treasury is that the only way for the US car industry to survive is if it is run by US executives and controlled by US shareholders. One proposal currently making the rounds is that the government will get warrants it if puts money into any of the car firms. It is a comfortable affectation. It looks a little like the bank bailout formula.

GM is worth a lot more than its $2.7 billion market cap. Toyota (TM) is about the same size in global sales, and it has a market cap of $106 billion. The variables between those two numbers include debt and liability covenants, labor obligations, and general direction of revenue growth. With the exception of the Japanese market, GM does about as well as Toyota does in Europe, South America, and Asia. GM’s burdens are a series of poor decisions over a long period of time. Its market share is fine.

The US government could hand GM a tremendous sum of money and watch it be burned up in the fire of management’s stupidity. Or, the government could take GM through the equivalent of a pre-packaged bankruptcy by dictating what its future obligations to creditors and unions will be in exchange for equity in what GM may become. At that point, the car company could simply be worth more in pieces. Its best operations could be sold off without legacy obligation.

Is GM worth as much as Toyota? No. But, in a restructuring of its relationship with debt holders and labor, one which allows it to continue operating without interruption, it is worth many times what its share price indicates.

Douglas A. McIntyre