GM: Buyout Better than Bailout

by: Washburn University Market Commentary November 21, 2008 | about stocks: GM    

Washburn University Market Commentary

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By Rob Weigand

There’s been a lot of cyber ink and hot air devoted to the question of whether or not the U.S. Government should get involved in General Motors’ (GM) difficulties. Here’s my two cents on the issue: Don’t bail out GM with loans – you’ll never see a nickel of that money again. Instead, the government should execute a hostile takeover of the whole company, hire one or more private equity firms to turn the company around, and bank a profit when GM’s stock can be sold to the public again in a few years.

At today’s price of $3/share, GM has a market cap of a little under $2 billion. The government should not only provide $25-$50 billion of emergency low-cost loans, but should spend another $4 billion and buy up all of GM’s stock at a 100% premium - $6 a share. That’s more than fair to existing shareholders.

There is more private equity talent sitting on the sidelines these days with nothing to do than can be imagined. Invite the best of the best in as equity partners. Ask them to put up a couple of hundred million to ensure they have sufficient skin in the game, and let them share proportionately when GM goes public again a few years from now. Let’s see what Steve Schwarzman and Henry Kravis are really capable of. These characters allegedly like high-adrenaline challenges; well, I’d say that GM qualifies. It’s one of the most broken companies of all time.

If Schwarzman, Kravis, or some other P/E genius can pull off this turnaround, they’ll preserve at least 100,000 jobs directly (although many will be lost), perhaps millions of jobs indirectly, save Detroit and Michigan from a horrible fate, re-invigorate American manufacturing, and make some money for both themselves and the U.S. taxpayer. And I can’t think of any better way for the U.S. Treasury to make sure it gets paid back on the loans it provides to GM than to buy up the whole company and retain majority voting rights while the firm is taken private. If Schwarzman or Kravis can turn GM around they’ll not only get richer, but they’ll forever be remembered alongside American icons like Lee Iaccoca. So they’ll get a “big-ego” payday as well - exactly what these guys are all about.

We need to break free of labels like “socialism” and “nationalization” that are limiting our thinking right now and recruit some of our most highly-talented American entrepreneurs to help us fix the monumental problems our country is currently facing.

Or, if you prefer to hear the case against bailing out GM made with a little humor in video format, check out this “truth hurts” offering from cartoonist Mark Fiore: Why GM Should Not Be Bailed Out.

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This article has 26 comments:

  •  
    Nov 21 04:39 AM
    my head hurts. i have a suggestion.

    i am sure the uaw and afl-cio has a few billion laying around in retirement funds. let them buy the company, and put at risk the retirement of all their members. then, when they turn the company around - they can each buy their own island in the south pacific. the union, at this point, has the most to lose and the most to gain. the shareholders are close to being wiped. let them hire one of those turn around geniuses. keep the government out of things.
    Reply | Link to Comment
  •  
    Nov 21 06:50 AM
    Pension funds should buy the companies if there is such great value. Truth is there is no value. Too much debt and labor is too expensive. Also, PE is really just a leveraged arbitrage play. Buy at low valuations, wait until markets get bubbly and ipo, rinse and repeat. What they are good at is eliminating corporate waste do to poor governance (every company wastes millions- corp boards are foxes guarding henhouses... esp when the chair is also the CEO.) But mainly its a huge arb play.
    Reply | Link to Comment
  •  
    Nov 21 08:32 AM
    Where have you been, Rob? Cerberus is a private equity firm. They bought Chrysler and then realized how incredibly challenging it is to design and build product, satisfy legacy obligations and deal with Federal emission and CAFE mandates and the UAW. It seems that all those New York MBA's really know how to do is churn worthless financial instruments. They've proven they can't run a car company.
    Reply | Link to Comment
  •  
    Nov 21 08:42 AM
    Why does the govt have to hand Detroit money directly? They've $350b left to hand out to "good banks" per Paulson's words. Just give a "good bank" or two the requested $25b on the basis that they do the lending. Buggers are said to be hoarding cash anyway.

    Or can it be that the Fed is being asked to hand out money to 3 companies with zero credit rating? And was this not the cause of the housing bubble? Are we now going to see a "major company" bubble?

    Puzzled.
    Reply | Link to Comment
  •  
    Nov 21 09:04 AM
    Sadly I must agree with this comment -- the extent to which private equity has truly added value vs. skimmed fees and repackaged the same tired old assets, remains an open question. I think the same questions pertain to active equity management and most hedge fund strategies as well.


    On Nov 21 06:50 AM eternitus wrote:

    > Pension funds should buy the companies if there is such great value.
    > Truth is there is no value. Too much debt and labor is too expensive.
    > Also, PE is really just a leveraged arbitrage play. Buy at low valuations,
    > wait until markets get bubbly and ipo, rinse and repeat. What they
    > are good at is eliminating corporate waste do to poor governance
    > (every company wastes millions- corp boards are foxes guarding henhouses...
    > esp when the chair is also the CEO.) But mainly its a huge arb play.
    Reply | Link to Comment
  •  
    Nov 21 09:13 AM
    You may well be right, Mr. Jimmy -- GM may be too far gone for anyone to fix. The timing of the huge economic downdraft makes the simple solution of just letting GM disappear problematic, however. Two or three years ago the economy was in a better position to absorb a GM bankruptcy (which probably leads to liquidation, because their revenues will vanish if they enter bankruptcy). It's virtually inevitable that the federal government will do something to prop up this zombie value-destroyer a little longer. When that happens, I want to see a mechanism that allows some possibility of upside to the taxpayer, and limits the chance that the first $50 billion begets the second $50 billion, etc.


    On Nov 21 08:32 AM Mister Jimmy wrote:

    > Where have you been, Rob? Cerberus is a private equity firm. They
    > bought Chrysler and then realized how incredibly challenging it is
    > to design and build product, satisfy legacy obligations and deal
    > with Federal emission and CAFE mandates and the UAW. It seems that
    > all those New York MBA's really know how to do is churn worthless
    > financial instruments. They've proven they can't run a car company.
    Reply | Link to Comment
  •  
    Nov 21 09:22 AM
    You think a private equity firm can run GM or any other auto company??? Look at Chrysler! It was destroyed by the private equity boys.

    Why not hire the best engineers, designers, and those with passion for building the best cars in the world?

    Just a thought...
    Reply | Link to Comment
  •  
    Nov 21 10:27 AM
    Can;t save the gluttony of the BIG THREE, so in walks John Lewis Mealer and Mealer American Motors Corporation, AKA Mealer Companies.

    Stay tuned this December before Obama is sworn in, and watch the economy begin to be pulled out of the ditch.
    Reply | Link to Comment
  •  
    Nov 21 10:31 AM
    The AFL CIO and UAW need to chill out and then be disbanded...
    These unions have run roughshod over the american corporations for far too long. Their usefull days are long gone... Fire the greedy CEOs, all managers, presidents, VPs and put the working people in charge until chair polishers can be brought in to do the paperwork.

    Mealer American Motors Corporation... watch for us in December...

    Keep in mind that a lot of dead people, cartoon charactures and idiots voted Obama in... We will do what we can to save the economy and rally Wallstreet this December.

    It's all about jobs and the McCain 3R Economic Energy program.

    Have a great CHRISTmas.
    Reply | Link to Comment
  •  
    Nov 21 10:34 AM
    Well, it's up to you to buy GM, Rod. I believe that the Gov'nt should not be involved in direct speculative investments.
    Reply | Link to Comment
  •  
    Nov 21 10:39 AM
    Regardless of Rob's intentions, which look good... I could buy GM right now.. But who wants the dregs of society (UAW) tagging along??

    Mealer American Motors Corporation.. aka Mealer Companies LLC
    Reply | Link to Comment
  •  
    Nov 21 10:59 AM
    This is another example of the republican hypocricy.

    What happened to the 'trickle down' theory?

    Does anyone have a compartive; of contributions, gifts, and charity to USA communities' between the large oil corporations and the automotive corporations?

    Have you ever worked like (a machine, 54 minutes of each hour) many UAW members have to?
    Reply | Link to Comment
  •  
    Nov 21 11:30 AM
    rambo74... You must know Mealer Companies if you are talking actually bending over backwards to help the American workforce and communities.

    Check my old investor site and get ready for December's unveiling of Mealer American Motors Corporation.
    Reply | Link to Comment
  •  
    Nov 21 12:15 PM
    If the US car companies are so great, why is Warren Buffet not investing in them and instead investing in a Chinese company BYD?
    Reply | Link to Comment
  •  
    Nov 21 12:23 PM
    JLMEALER
    Actually, Obama was elected because intelligence won out of the usual fear mongering, hate mongering, war mongering, divisive deceitful greedy no nothing racist mentality that the Republicans hoped would win.
    You must be kidding if you think more tax cuts for the rich and large corporations at the expense of the rest of us is sound economic policy. Regressive taxes have never worked and never will.

    Reaganomics has had over 25 years to prove itself, and it is an utter failure for 80% of Americans. Whatever wealth was created all went to the top. The facts are the facts.
    And I don't believe for a minute that any wealth created during the 80s and 90s had anything to do with Reaganomics. The revolution in technology in computers, internet, telecommunication, robotics biotechnology were much bigger factors.
    $9 trillion of the $10 trillion federal deficit came under the past three Republican administrations. Their deregulations brought us the savings and loan scandal and the current credit crisis.
    Since Reagan came into office working wages have gone down while the rich have raked it in by the truckload.
    Coporate executives saw their pay go up ten fold in the same period, when compared with workers pay. Workers now make 12% less in buying power than workers 30 years ago made.

    McCain's energy program is lame. Solar and Wind can be built and be up and running two to three times faster than the nukes he favors. And they are both cheaper. And neither will need any fuel ever- to prospect for, mine, transport, store, refine, burn, clean up the mess from or fight wars over. If we build nuclear on a large scale we will be looking at peak uranium before we can even get them built. We import 90% of our uranium. How does that give us energy independence?
    transitionculture.org/.../
    Link to The Lean Guide to Nuclear Energy"
    I'm not saying we shouldn't consider nuclear at all, but it shouldn't be the priority when better choices are available.
    One of nuclear's biggest problems is the vast quantities of water required to cool the plants. In a water strained world that's won't be good thing.

    Drill baby Drill is less than a bandaid.

    Are you already blaming Obama for the economy like that idiot Sean Hannity?












    Reply | Link to Comment
  •  
    Nov 21 04:40 PM
    this was the stupid thing i've ever seen come out of an "idea" to handle GM. Have the gover't buy GM ?? Get real. If you think the current bureaucracy that exists within the company is bad. Wait until the gov't gets involved.

    GM needs to shrink not get bloated even more
    Reply | Link to Comment
  •  
    Nov 21 05:26 PM
    Rob, you should wake up that this won't work... maybe you didn't notice but the Private Equite VC Fund Cerberus tried exactly that at Chrysler and failed...
    Reply | Link to Comment
  •  
    Nov 21 07:37 PM
    Liac: Great comment, but you omitted one key point -- what's your solution? Let go of another 4 million jobs (directly and indirectly) and push the economy from recession to depression? You're parroting the O'Reilly-Hannity-Palin... party lines -- but what IDEAS do you have to make things better? All you know is what WON'T work.
    Reply | Link to Comment
  •  
    Nov 22 01:07 AM
    "The government should not only provide $25-$50 billion of emergency low-cost loans, but should spend another $4 billion and buy up all of GM’s stock at a 100% premium - $6 a share. That’s more than fair to existing shareholders."

    Rob, are you out of your mind? You cannot possibly believe that the govermnent bailing out investors' bad decisions at 200% is anything other than complete horseshit. Capitalism and prosperity aren't always the same thing.
    Reply | Link to Comment
  •  
    Nov 22 09:23 AM
    Hand,

    That's a terrific idea you have. Indeed, when the employees buy the company they work for it's called an ESOP, which is already well established in law.

    It would be amusing to see how quickly such auto based ESOP's alter their collective bargaining agreements to help their OWN companies survive. You wouldn't even recognize them in short order, I'd venture to say.
    Reply | Link to Comment
  •  
    Nov 23 04:11 AM
    Germany is supporting Opel. The EU is supporting their Auto Industry. Who in the right mind wants to loose more American manufacturing ? Yes China does, and the Japanese do, & European are gleaming at the thought another industry hits the dust in good ol' USA.

    Now we want to sink Citigroup a Global Bank. We're already heading downhill in financial power. GE next ? Oh my, 100's of companies are leveraged, that has been the American way. You have so much pride in capitalism that your destroying Capitalism. So who will help pay off the National Debt ? The Japanese ? The Europeans ? Sorry those earnings will either go overseas or purchase more Treasury Notes, thus increasing Debt. And just because a foreign company employs an American worker here means diddly to the Trade Deficit added each year to The GRAND debt. China has overtaken the Japanese in holder of American debt.
    China's earned new status -- it now owns nearly $1 out of every $10 in U.S. public debt Additionally, the more China & Japan invests in U.S. debt, the harder it becomes for U.S. companies to sell their products overseas. Soon enough (if not already) whoever owns the most Treasuries can manipulate and fine tune the amount of US Exports thru interest rates, and the increase & decrease of the dollar.
    If Americans want the Auto Industry go in the same way as the Steel Industry, the Textile industry, and the list goes on (too long to post). I can just picture the Rating Companies downgrading the AAA rating on Treasuries. And don't think that will never happen. We need to have a larger picture and a goal, irregardless of today's costs if we want a brighter future.

    No different from the massive debt West Germany has burdened itself to merge East Germany. To help GM is a pittance what it took to merge the West with the East - and look at it today, its the strongest economy in richness and will always be, because the future is more important than today.
    Reply | Link to Comment
  •  
    Nov 23 04:27 AM
    rambo 74,

    It is the Congress to blame. They fell asleep on duty.
    For that much pay and benefit, I would work like a mule
    if I have to for 8 hours nonstop.
    Reply | Link to Comment
  •  
    Nov 23 04:43 PM
    Who is going to buy all these cars? This economic contraction is system wide. The American consumer, who makes up over 60% of the U.S. economy, has no more ability to spend. This situation will not turn around until jobs are created and incomes rise. Only then can a debt based economy expand.
    GM and Ford have not had sustained net profits since 2002. They lose money for every car they sell. And for this we should "break free of labels like “socialism” and “nationalization” that are limiting our thinking”?
    This industry will have to undergo many changes to allow new entrepreneurs to enter and reinvigorate the auto building process. The short term solution of "saving" jobs through a government takeover is short sighted and ultimately counterproductive.
    Reply | Link to Comment
  •  
    Nov 23 06:40 PM
    If anyone could do it ... give it to Mitt Romney to fix. Car history going back to his Dad, VC history, etc. He could have turned GM around. He probably can fix Ford.

    But GM is so in hock to these UAW contracts that the only way out is chapter 11, tear up the contracts, revamp the debt load, and get a clean start as a smaller but profitable company.

    The Govt 'bailout' is a terrible idea precisely because it is a 'fix' that prevents the real solution from taking place. It will continue the economic vampirism of having GM ship dollars out with every car they make.
    Reply | Link to Comment
  •  
    Nov 23 06:55 PM
    "Great comment, genius, but you omitted one key point -- what's your solution? Let go of another 4 million jobs (directly and indirectly) and push the economy from recession to depression? "

    How about
    1. repeal sarbanes oxley
    2. Declare that the Bush tax cuts and current tax rates will be made permanent, instead of increasing taxes like the Democrats plan
    3. Push for *real* middle class tax cuts by lowering rates below $200,000 to 15%.
    4. End the offshore drilling ban, permanently.
    5. Announce and declare that since UCLA economists have analyzed and figured out that FDR lengthened the Great Depression, that we wont be following the failed FDR New Deal model of socialism and wage regulation.
    6. Put the uptick rule back in.
    7. Spend the rest of the TARP money on buying the 'bad assets' but at market prices only. Given the fact that orange county housing prices have bottomed, this $350 billion purchase would likely be a net positive for long-term Federal balance sheets.
    8. Make assurances that mortgages wont be rewritten in bankruptcy proceedings.
    9. End the rule that discourages repatriation of capital via excessive corporate income taxes on foreign earnings. (If a company makes money in say Ireland, they have to pay the 35% rate on it, ON TOP of the rate paid to foreign government, *unless* they keep the money overseas. Its like punishing companies for bringing money back to the US!) This flaw in our tax law is why corporations are set up overseas and discourages US investment. Its nuts. Have a 2 year holiday on that tax, which will likely increase US capital investment by hundreds of billions.
    10. Make a declaration that we will NOT destroy the energy and coal industries with cap-n-trade restrictions on CO2. This bill would be the equivalent of a huge job-killing tax hike.
    11. Declare that the US Government does not want to feed failure but reward success. $100 billion of the TARP bailout will be set aside for a 1-year reduction in corporate income taxes from 35% to 15%, so long as the difference is invested in the US.

    Since Obama was elected, market went down 20%. If these policies were announced, we would get that 20% back IN A DAY, and the recession would be short and not as bad as feared.
    Reply | Link to Comment
  •  
    Nov 23 06:59 PM
    "Drill baby Drill is less than a bandaid. "

    That's idiotic. 85 BILLION barrels are off-limits due to US Govt rules, USGS estimates, that is a 2 DECADES of US oil consumption, and a study showed that changing the rules does change the prices of oil immediately. Add in shale in CO and we could have a serious reduction in foreign oil use.
    Reply | Link to Comment
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