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Inside scoop to GM bankruptcy deal!

By Amarendra Bhushan for CEOWORLD Magazine Updated:June 2, 2009

U.S. car giant General Motors Corp.’s bankruptcy filing, of the fourth-largest bankruptcy ever yesterday will do what its past chief executive officers could not – strip the company of 14 plants and 17,000 U.S. jobs, costing the governments of the United States America and Canada $40 billion.

General Motors Corp.’s Asian operations will be unaffected by its bankruptcy and the automaker plans to open new factories in China, Thailand and India even as it closes U.S. facilities.

General Motors Corp.’s (GM) bankruptcy filing and the slowdown in the global automobile market will delay its plan to buy auto parts worth about $1 billion a year from India by 2010.

Obama lauded what he called a “viable, achievable plan that will give this iconic American company a chance to rise again,” as GM followed Chrysler L.L.C. into Bankruptcy Court. Of Detroit’s Big Three automakers, only Ford Motor Co. has avoided bankruptcy restructuring and has not taken federal bailout money.

- The China unit of automaker General Motors continues to expand despite the woes of its parent.

- China GM arm is still in talks with local firm First Automotive Works (FAW) to set up a commercial vehicle joint venture.

- GM is sticking with a five-year plan to double annual sales to 2 million units and roll out 30 new or updated models.

- Bankrupt General Motors today said it is facing difficulties in raising funds for its under-construction engine transmission plant in India, involving an investment of $200 million.

- GM sourced about $500 million of auto parts from India in 2008. The auto maker buys components such as casting and machining parts from Indian suppliers.

- In India, GM is trying to line up financing for an engine factory, announced plans in August for the plant near Pune.

- In Thailand, GM said it will press ahead with a $445 million plan to expand its manufacturing base by building a new factory and upgrading.

- The judge Robert Gerber overseeing General Motors’ bankruptcy filing is speeding the process along.

- GM South Africa isn’t part of the filing in the U.S. and creditors of the parent would have no claim on the South African unit as it hasn’t guaranteed any U.S. obligations or had any of its assets used as security for GM’s obligations.

- GM said the White House had to act to prevent a liquidation that analysts say would have cost tens of thousands of jobs at a time when the economy is mired in recession. GM alone employs 92,000 in the US and is indirectly responsible for 500,000 pensioners.

Here is a verbatim transcript of Barack Obama’s speech.

I also recognise the importance of a viable auto industry to the wellbeing families and communities across our industry in the Mid-West and across the United States. In the midst of a deep recession and financial crises, the collapse of these companies would have been devastating for countless Americans and done enormous damage to our economy beyond the auto industry.

It was also clear that if GM and Chrysler remade themselves for the twenty-first century, it would be good for American workers, good for American manufacturing and good for America’s economy. I decided then that if GM and Chrysler and their stakeholders were willing to sacrifice for their company’s survival and success, if they were willing to take a difficult but necessary step to restructure and make themselves stronger, linear and more competitor then the Untied States government would stand behind them.

The original restructuring plan submitted by GM and Chrysler earlier this year did not call for the sweeping changes these companies needed to survive and I couldn’t in good conscience proceed on that basis. So we gave them a chance to develop a stronger plan that would put them on a path towards long-term viability. The 60 days GM had to submit its revised plans have lapsed.

I want to say few words about where we are and what steps we will be taken going forward. But before I do, I want to give you an update on where things stand with Chrysler. When my administration took office and began going over Chrysler’s books, the future of this great American car company was uncertain. In fact, it was not clear whether it had any future at all. But after consulting with my auto task force, industry experts and financial advisers and after asking many tough questions, I became convinced that if Chrysler were willing to undergo a restructuring and if it were able to form a partnership with a viable global car company then Chrysler could get a new life. That more promising scenario has now to pass.

Today after taking a number of painful steps and moving through a quick, efficient and fair bankruptcy process, a new, stronger, Chrysler is poised to complete its alliance with Fiat. Just 31 days after Chrysler’s Chapter XI bankruptcy filing, a court has approved the Chrysler-Fiat alliance paving the way for a new Chrysler to emerge from bankruptcy in the next few days. What happens next is in the hands of their executives, managers and workers as it is for any private company. What the completion of this alliance means is that tens of thousands of jobs that would have been lost if Chrysler had liquidated will now be saved and the consumers have no reason at all to worry about a restructuring even one as painful is what Chrysler underwent.

Keep in mind many experts said that a quick surgical bankruptcy was impossible – they were wrong. Others predicted that Chrysler’s decision to enter bankruptcy will lead to an immediate collapse in consumer confidence that would send car sales over a cliff – they were wrong as well. In fact Chrysler sold more cars in May than it did in April because consumers were confident by our extraordinary commitment that stand behind a quick bankruptcy process. All an all it’s an outcome dramatically better than what appeared likely when this process began.

The situation we found in General Motors was very different from what we found in Chrysler largely because GM is a different kind of company; it is much larger and much more complex with operations all over the globe. In this context GM’s management team including its new CEO Fritz Henderson, its Interim Chairman Kent Krasa and all of their colleagues has worked tirelessly to produce a plan that meets the strict standards I laid out in the beginning to streamline GM’s brands, cleanup GM’s balance sheet and make it possible for GM to compete and succeed.

Working with my auto task force, GM and its stakeholders have produced a viable, achievable plan that will give this iconic American company a chance to rise again. It’s a plan tailored to the realities of today’s auto market; a plan that positions GM to move towards profitability even if it takes longer than expected for an economy to fully recover and it’s a plan that builds on GM’s recent progress in making better cars. If this plan takes effect GM will start building a larger share of its car including fuel efficient cars. If all goes according to plan the share of GM cars sold in the United States that are made here will actually grow for the first time in three decades.

Anytime a business as large as General Motors goes through a restructuring, it is extremely difficult to find common ground among all of the company’s stakeholders. But the deal that has been worked out is tough, it is also fair. It will require the United Auto Workers to make further cuts in compensation and retiree healthcare benefits, painful scarifies on top of all they have already done, it will require GM shareholders to give up the remaining value of their shares just as they would if they had to do in private restructuring of this kind and it will also provide unsecured bondholders with an equitable outcome; an outcome that will let me recover more than the current value of their claims and substantially more than they would have recovered if the government had not intervened and GM had liquidated that’s why a majority of GM’s bondholders already support this deal.

Throughout this process, I wanted to ensure that none of GMs stakeholders receives special treatment because there is government’s involvement. That’s why I instructed my auto task force to treat all of GM’s stakeholders fairly and to ensure that this restructuring was carried out in a way that was consistent.

What we have done is a credible plan that is full of promises but GM cannot put this plan into effect on its own. Executing this plan will require a substantial amount of money that only a government can provide. Considering GM’s extensive operations within their borders, the governments of Canada and Ontario have agreed to do their parts with an investment in GM’s future. I want to thank them from doing so. I also want to thank the government of Germany for working diligently to reach a memorandum of understanding (MoU) on the sale of a major stake in GM’s European division and for providing interim funding that will make it possible for that transaction to be finalized.

But of course GM is an American company with tens of thousands of employees in this country and responsibility of its future ultimately rests with us. That is why our government will be making a significant additional investment of about USD 30 billion in GM; an investment that will entitle the American taxpayers to ownership of about 60% of the new GM.

We inherited a financial crisis unlike any that we have seen in our times. This crisis crippled private capital markets and forced us to take steps in our financial system and with our auto companies that we would not have otherwise even considered. These steps have put our government in the unwelcome position of owning large stakes in private companies for the simple and compelling reason that the survival and success of our overall economy depend on.

We are making these investments not because I want to spend the American people’s tax dollars but because I want to protect them. Instead of taking so much stock in GM, we could have simply offered the company more loans. But for years GM has been buried under an unsustainable amount of debt and piling an irresponsibly large debt on top of the new GM would mean repeating the mistakes of the past. So we are acting as reluctant shareholders because that is the only way to help GM succeed.

What we are not doing — what I have no interest in doing is running GM. GM will be run by a private board of directors and management team with a track record in American manufacturing that reflects a commitment, intervention and quality. They – and not the government – will call the shots and make the decisions about how to turn this company around. The Federal government will refrain from exercising its rights as a shareholder in all but the most fundamental corporate decisions. When a difficult decision has to be made on matters like whether to open a new plant or what type of new car to make, the new GM – not the United States government – will make that decision.

In short our goal is to get GM back on its feet, take a hands off approach and get out quickly; exceeding a restructuring of this scale however requires not only new investment, it also requires giving GM a chance to start anew by clearing away the massive past debts that are weighing the company down. That is why earlier today (June 1, 2009) GM did what Chrysler has successfully done and filed for Chapter XI bankruptcy with the support of its key stakeholders and the United States government.

In all likelihood this process will take more time for GM than it did for Chrysler because GM is a bigger, more complex company. But Chrysler’s extraordinary success reaffirms my confidence that GM will emerge from its bankruptcy process quickly and as a stronger and more competitive company. I want to remind everyone that if you are considering buying a GM car during this period of restructuring, your warrantees will be safe in government banks.

So I am confident that the steps I am announcing today will mark the end of an old GM and the beginning of a new GM; a new GM that can produce the high quality, safe and fuel efficient cars of tomorrow. They can lead America towards an energy independent future and that is once more a symbol of America’s success.

But I want to be honest with you – building a linear GM will come at a cost. It will take a painful toe on many Americans who have relied on GM throughout the generations. So I want to say a word directly to all the men and women watching today wondering what all this would mean as far as their own lives are concerned.

I know you have already seen more than your fair share of hard times. We saw 400,000 job lost in the auto industry in the year before this restructuring even began. I will not pretend that the hard times are over; difficult days lie ahead, more jobs will be lost, more plants will close, more dealerships will shut the doors and so will many part suppliers. But I want you to know that what you are doing is making a sacrifice for the next generation; a sacrifice you may not have chose to make but a sacrifice you will nevertheless called to make so that your children and all of our children can grow up in America that still makes things; that still build cars, that still strive for better future.

As autoworkers and auto communities pass through these difficult times, we as a nation must do our part. That’s why in March I appointed Ed Montgomery, Director of recovery for auto communities and workers, that’s why two weeks ago Ed announced a green jobs training programme for autoworkers and hard hit communities. That’s why last week Ed and Karen Mills my Small Business Administration Chief travelled to Indiana to announce new plans to provide loans to auto, RV (Recreational Vehicle) and boat dealers to help finance floor plans. That’s why we are accelerating the purchase of a federal fleet of cars to jumpstart demand and give the industry a boost at a time when it needs one and that’s why I am calling on Congress to pass fleet modernisation legislation. They can provide a credit to consumer who turn in old cars and purchase cleaner more fuel efficient cars.

These are important steps on the long road to overcoming a problem that didn’t happen overnight and will not be solved overnight. I recognise that today’s news carries a particular important speaker, its not just any company we are talking about; it’s GM. It’s a company that’s not only been source of income but a source of pride for generations of autoworkers.

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