IHS Global Insight Perspective | |
Significance | General Motors filed its annual report yesterday with the U.S. Securities and Exchange Commission (SEC), including a "going concern" notice from independent auditors Deloitte & Touche stating that without new cash, GM is unlikely to be able to avoid bankruptcy. |
Implications | The news has led to a flurry of speculation surrounding GM's ability to survive and create a viable business, and sent the company's shares down 15% on the New York Stock Exchange to below US$2.00 per share. |
Outlook | Anyone who has been following GM's ongoing struggle amid the worsening recession would already have been aware that without government cash in the next several weeks, the company will be forced to declare bankruptcy. |
Auditors from Deloitte & Touche have filed their "going concern" report on General Motors (GM) with the U.S. Securities and Exchange Commission (SEC), according to numerous news reports. The news was not unexpected as GM had warned of such a move during its year-end earnings report earlier in the week, when it posted a US$31-billion loss for the full year 2008 and greater-than-expected cash burn rates for the fourth quarter of 2008 and the first quarter of 2009. The independent audit, included in GM's annual report filed yesterday morning, stated that "our recurring losses from operations, stockholders' deficit and inability to generate sufficient cash flow to meet our obligations and sustain our operations raise substantial doubt about our ability to continue as a going concern".
Several issues triggered the "going concern" notice, not least a looming US$1-billion convertible debt obligation that matures on 1 June, along with US$27 billion in long-term bond debt that the company is still trying to restructure. In the absence of a restructuring plan with creditors and bondholders (there is still no agreement despite ongoing negotiations), GM would be responsible for a considerable amount of money, probably pushing the company into bankruptcy. GM stated that it had, however, negotiated a stay from holders of nearly US$6 billion in debt who would be eligible to call in their loans following the "going concern" notice. The company stated that it managed to convince those lenders to hold off their calls pending GM's request for US$16.6 billion in additional government aid. The "going concern" notice has increased doubts about GM's ability to not only create a viable business plan, but to avoid bankruptcy altogether, according to several reports. Wall Street reacted badly to the news, sending the company's stock down 15% to under US$2.00 per share yesterday.
Outlook and Implications
Anyone who is surprised by the "going concern" notice simply has not been paying attention over the last six months to GM's ongoing struggle. The move was expected, but it does serve to underscore the dire situation in which the company currently finds itself. GM and several other analysts and executives have put it as plainly as possible: the company cannot avoid bankruptcy unless it receives an influx of at least US$16.6 billion from the U.S. government in the next couple of weeks, or at least a portion of that in order to make it through the next couple of months. But GM (and Chrysler and Ford) is actually expecting to obtain considerably more than that, as this does not take into account the US$25 billion in low-interest loans that are still scheduled to be disbursed by the U.S. Deptartment of Energy. All three companies are thought to have requested some of that money, which will go towards helping retool plants in order to make a fleet of more fuel-efficient cars and trucks in the United States. Wall Street's reaction to the "going concern" news was somewhat strange given that it was not a surprise at all, and said nothing that GM had not been warning for several weeks already.
But the question that keeps being raised is whether or not GM can survive this downturn in the market. The short answer is "yes", but after all is said and done the company may look considerably different to how it does now. The company has already spun off Saab, announced the impending spin-off or closure of the Saturn and Hummer brands, and has entered into negotiations with several European governments about the possibility of separating itself from its European operations. Reports suggest that GM may give up control (or at least a significant equity stake) in its European Opel and Vauxhall brands to European national governments in order to secure as much as US$4 billion needed to keep those operations going. Such a move would dramatically change GM's strategy of global integration, and it is almost certainly not something the company wants to do seeing that it is heavily reliant on Opel's engineering work for its global C- and D-segment vehicle platforms. If GM can create a situation similar to its GM Daewoo Auto & Technology (GMDAT) group in South Korea, in which it possesses only a 50.9% equity stake, then it still may be able to exercise control and utilise the European region for its global strategy (a preferable option). Creating a similar structure for its European brands might provide the company with a way to continue utilising the resources so critical to its global strategy while still helping it find a way to fund the struggling local operations.