Why we can't trust auto industry's promises
Posted
Dec 02 2008, 06:26 PM
by
Andrew Horowitz
Rating:
The headlines are all a bustle over the drama as the Beggars of Detroit visit the Interrogators of D.C. But the most concerning thing is that the facts keep changing. The latest reports show that the original $2 billion monthly burn rate estimate for General Motors has increased to $5 billion per month. It is frightening to learn now that the estimate is already outdated. In fact, MSNBC reports that if GM is to survive 2008, they will need an initial $4 billion and another estimated, $18 billion in total assistance.
In what appears to be a virtual checkmate, auto companies are posturing between being politically correct and satisfying the outcrys of Americans to win over billions of dollars. It is quite clear that most Americans are reluctant to give another cent to zombie companies that have a history of losing money in even the best of economic times. But give we will.
It is just amazing (or perhaps amusing) that it has taken Ford and GM until now to come up with a plan to fix their beleaguered balance sheets. What have they been doing all of this time? Would it of been so hard to have a plan in place before asking for a massive injection of taxpayer money? MSNBC reports:
"Mulally and Wagoner both said they’d work for $1 per year if their firms took any government loan money, while Ford offered to cancel management bonuses and salaried employees’ merit raises next year, and GM said it would slash top executives’ pay. Both said they would sell their corporate aircraft."
In fact, GM's Wagoner only said that he would be willing to work for a $1 salary after it was suggested by Ford's Mulally. But salary is only part of the pay package. According to a November 18 story in the Wall Street Journal:
The Securities and Exchange Commission filings reported earlier this year that gave Mr. Wagoner, the company's chairman and chief executive, a 33% raise for 2008 and equity compensation of at least $1.68 million for his performance in 2007, a year for which the auto maker reported a loss of $38.7 billion. The salary increase puts Mr. Wagoner's salary for this year at $2.2 million, compared with $1.65 million in 2007.
In addition to his base pay, Mr. Wagoner was been awarded 75,000 restricted stock units valued at $1.68 million, based on GM's closing stock price in March. He was also given stock options representing 500,000 shares.
So, the salary of $1 is probably just fine with Wagoner as he is actually working now to save the value of what remains of his estimated 52,765 GM shares. This is, of course, after he already sold $1.5 million worth at approximately $29.60 per share back in March 2008. Ironically, that was almost exactly two years after GM's finance arm (GMAC) was forced to restate four years of filings after accounting deficiencies were discovered. That led to a grand jury probe into several relationships with GM's suppliers.
One month later, in April 2006, GM received a cash infusion (now termed a bailout) of $14.6 billion from the partial sale fo GMAC. At the time, the players were the strikingly similar to those showing up on the banking breadlines during the past few weeks:
"GM expects to receive about $14-billion over the next three years from the GMAC deal. The stake is being purchased by a consortium of investors led by Cerberus Capital Management LP, a private investment firm. The group includes Citigroup Inc. and Aozora Bank Ltd. The sale is expected to be completed in the fourth quarter of 2006."
At that time, CEO Wagoner said the sale would:
"...strengthen GM's balance sheet as the automaker carries out its plans to recover from $10.6-billion in losses in 2005 and stem the loss of its U.S. market share to Asian competitors.
"In the context of history, the last six months are going to prove to be pivotal," Wagoner said. "This is about restructuring our business so we can be robustly profitable in the future, so we're not so balanced on a razor's edge (that) if gas prices go up, you don't make any money, if your sales go down 10 percent you don't make (any money)."
Now what happened to the $14.6 billion from 2006 and why should GM get another $18, $25 or (more probable) $50 billion? I'd like to know how Wagoner is going to keep the company profitable when it was just reported that sales of autos in the U.S. plunged 37% last month.
There are no signs that the economy will recover imminently so it would probably take some magic or even a miracle to put GM on pace for profits. Short of that, this bailout looks like money being thrown down a pit with no bottom in sight.
Related reading:
A Plan to Fix the Auto Industry
Video: Andrew on Fox: Union Busting
Come on. Is driving to Capital Hill really necessary?
What if GM goes broke?
TDI Podcast : Auto Industry at the Crossroads
Andrew Horowitz is a money manager and the founder of Horowitz & Company. He is also the author of the bestselling book, The Disciplined Investor . Check out his latest investment idea or listen in as he hosts, The Disciplined Investor Podcast.
