GM's Toughest Sale Yet: A Turnaround

SAN FRANCISCO – Getting Wall Street to buy its turnaround plan may be General Motors Corp.'s (GM) toughest sale yet.

There's no time to lose.

After watching GM's share price plummet to an 18-year low last week, Chairman and Chief Executive Rick Wagoner has worked tirelessly to beat back bankruptcy fears and douse speculation that he might step down.

The effort triggered a brief rebound in the share price, but stopped short as Wall Street again began questioning whether the world's biggest automaker is just buying time.

That the top executive had to even directly address bankruptcy raises tough questions about what would actually happen if GM did file for Chapter 11 protection.

"If you would have asked that question three years ago, you would have been met with peals of laughter," said Mitch Stapley, chief fixed-income officer at Fifth Third Asset Management in Grand Rapids, Mich. "Now we're in the position of talking about this. It's a credible discussion."

"We have challenges that we're well aware of and we're aggressively addressing those challenges," said GM spokesman Jerry Dubrowski on Tuesday. He added that the company is counting not only on cost cuts but also on new products to boost revenue and profitability.

The Detroit giant's plan this week to cull 30,000 jobs from its 325,000-strong workforce outlined a smaller company under pressure from and losing market share to its Japanese rivals.

But unlike most corporate downsizings, the announcement failed to give the Dow component's shares a lasting boost.

One explanation for that lies in widespread concerns of a strike at recently bankrupt Delphi Corp. (DPHIQ) , GM's biggest supplier. If the battle over wages and benefits between Delphi and its UAW workers chokes off the flow of parts, GM's assembly lines could also come to a standstill.

Meanwhile, analysts are clamoring for details of GM's downsizing plan, wondering, for example, what would happen to employees still on the payroll after production lines are shuttered.

"One of the problems with [the] announcement is it doesn't address the jobs bank issue," said Gimme Credit debt analyst Shelly Lombard. The next round of labor talks with the United Auto Workers over just those kinds of issues are set to come to a head in 2007, shortly after GM rolls out its revamped product line.

Those new products, as well as plans to sell its profitable GMAC financing unit and a $19 billion cash pile, are likely to help GM stave off any immediate threat of bankruptcy. But all the pieces have to fall into place over the next year or so.

The year "2007 or 2008 is when either the wheels come off this thing or people realize this is a keeper," according to Lombard.

Eye on Sales

GM's blueprint calls for tough measures to get the North American operations back to profitability, yet the solution lies as much with cutbacks as it does with vehicles that sell better.

"One of the problems we have in bankruptcy is that you can't just skinny down to meet the market if the market doesn't want what you're making," said Bill Brandt, chief executive of restructuring firm DSI.

Through October, GM's sales accounted for 26.5% of the U.S. light-vehicle market, down from 27.8% in the first 10 months of 2004, according to Wards' light-vehicle sales. Add Chrysler and Ford, and the Big Three claim 58.7% of the domestic market, down from 60.3% last year.

Stopping that drop in market share is a priority for all the domestic automakers, regardless of their financial health.

Even if GM fails to keep itself from tumbling into Chapter 11, industry analysts say that doesn't spell the end of the company. GM would continue to turn out new models, provide service and parts and honor vehicle warranties.

"The analogy is out there that people will fly on bankrupt airlines, but they won't buy cars from a bankrupt company. That just seems to indicate an ignorance of the facts," said Paul Taylor, chief economist at the National Automobile Dealers Association.

High Stakes

Among debt investors, Gimme Credit's Lombard said that it wouldn't be hard to find buyers for a bankrupt GM's bonds.

"I think the market can afford this. There are huge pockets of capital out there and people have been anticipating it," she added.

At the same time, it's very hard to value the company's debt right now because of huge unknowns like its pension liability -- which varies depending on who is doing the accounting -- and due to union negotiations in 2007 that will determine the company's costs.

All those variables have created a rough road for investors, with many opting to move their money elsewhere.

GM shares have fallen 41% in value so far this year, leaving the company with a smaller market capitalization than Ford Motor Co. (F) , which sells fewer vehicles. GM's market cap is down to $13.2 billion while Ford's stands at $14.9 billion.

Meanwhile, GM's shaky financial health has the federal Pension Benefit Guaranty Corp. keeping a wary eye on the future of the world's biggest private-sector pension plan.

The PBGC has been forced to take over huge retirement plans from the steel and airline industries, and already has sounded alarms in Washington about being woefully underfunded if GM were to add its thousands of retirees to the list.

The agency, funded by premiums on employers rather than taxes, said last week that it paid $3.7 billion in 2005 to cover stranded retirement plans, up from $3 billion a year ago.

"We always monitor our insured risks, and that company is the largest insured risk in the agency's entire book of business," said PBGC spokesman Randy Clerihue.

Those workers are represented by the United Auto Workers, who recently took a long look at GM's finances before they agreed to take on higher health-care costs.

The union even brought in outside advisers to look at the books.

"We don't think that bankruptcy is a real threat at GM," said Paul Krell, UAW spokesman. "A lot of the bankruptcy speculation is just people feeding off Delphi and saying, 'What if?'"