GM may have left bankruptcy too soon

Since GM came out of bankruptcy in July, attempts to sell Opel, Saturn and Saab have faltered.

By TheStreet Staff Dec 15, 2009 8:59AM

TheStreetBy Ted Reed, TheStreet

 

General Motors' use of an unusual method allowed it to emerge from bankruptcy extraordinarily fast, but it also may have hindered three major asset sales and cost CEO Fritz Henderson his job.

 

GM reorganized in a frantic, 40-day bankruptcy. Between June 1 and July 10, it not only sold off assets, but also shed $40 billion in debt, selected a new chairman, decided to close plants while transferring work to others and worked to close excess dealerships, which meant that Henderson, appointed CEO in March, had to prepare for and attend a congressional hearing on the subject.

 

Since coming out of bankruptcy, several attempts to sell assets have faltered. A deal to sell Opel, reached in late May, ended last month when GM pulled out. A deal to sell Saturn, reached in early June, collapsed in September when buyer Penske (PAG) pulled out. A deal to sell Saab, reached in mid-June, collapsed last month when buyer Koenigsegg Group pulled out. A deal to sell Hummer, reached in October, is waiting for approval from the Chinese government.

 

 

Some observers say those failures contributed to the decision to oust Henderson after eight months as CEO. And some wonder, might GM have been able to make better, more sustainable deals if it had more time to make them?

 

 

"It seems to me the emergency, rather than the typical considerations of a bankruptcy, drove the process," says Jeffrey Coyne, senior lecturing fellow at the Duke University School of Law, a management consultant who specializes in reorganizing troubled companies. "As it turns out, we now have a number of transactions that were supposed to happen, but didn't."

 

"The question is, 'Was it so urgent you couldn't take a few weeks and figure out whether each deal was property structured?" Coyne adds.

 

Peter Ward, a professor at the Fisher College of Business at Ohio State University, echoes the thought. "Deals that seemed good on the back of the envelope seemed less good under the scrutiny and diligence that occurred post-bankruptcy," he says.

 

"The speed of the bankruptcy-related deals made it inevitable that reflection would come later," Ward says. "In these cases, reflection killed them."

 

GM's unusual use of the 363 bankruptcy process eliminated barriers that might have existed in a typical Chapter 11. A 363 filing enables a company to get expeditious treatment and to largely bypass creditors, who do not have the same rights to force consensus as they do in a Chapter 11 bankruptcy, where they would typically seek deals that would maximize return on their distressed debt.

 

In GM's case, a principal interest of the largest creditor, the federal government, was to ensure that the automaker emerged quickly from bankruptcy; the belief was that a longer stay might deter consumers from buying GM products.

 

In the bankruptcy, valuable assets like Chevrolet and Buick were sold to the new GM, which emerged in July. Worthless assets were retained by Motors Liquidation (MTLQQ), which continues in Chapter 11. Its shares are still traded, even though they will be wiped out, and shareholders will get zero when the case concludes.

 

Jean Robertson, a Cleveland bankruptcy attorney whose firm represents several suppliers in the GM case, says the principal problem with the three failed asset sales is that the assets have little value.

 

"They are trying to sell junk," she says. "There was some enthusiasm, but now potential buyers have come in and done their due diligence, and when they took a harder look, they realized it was not a good deal."

 

Robertson says GM "made these announcements prematurely, hoping they would create consumer confidence" that Opel, Saab and Saturn were going concerns. But the effort backfired, she said, "when people heard about the deals cratering."

 

As for the several suppliers who are clients of her firm, Calfee Halter & Griswold, Robertson does not expect they would have received any return on their debt no matter how the bankruptcy was structured. The automakers "were suffering for many years, and when they fell they were going to fall hard," she says. "Everyone gambled by staying in, and everyone -- the suppliers, the OEMs, the consultants, the lawyers -- knew it was going to be a crash and burn."

 

GM says it is the condition of the auto industry rather than the method of the bankruptcy that has impeded the asset sales. The inability to close deals "reflects the ongoing crisis in the auto industry, depressed worldwide sales and an almost total lack of non-governmental capital to make deals happen," says spokesman Tom Wilkerson. The only recent deals to close were the Tata-Rover-Jaguar deal and the Fiat purchase of Chrysler assets, he says.

 

"This is not a GM problem; it is an industry problem," Wilkerson says.

 

Ford (F) in contrast, took advantage of not being hurried. In the summer, Ford reportedly slowed down bidding for Volvo in an effort to get a better price after GM arranged an Opel sale. Today, Ford is still ironing out details to sell Volvo to China's Zhejiang Geely Holding Group, which it selected as its preferred bidder in October.

 

Still, a speedy bankruptcy enabled GM to resolve multiple problems, chiefly shedding debt, yet involved little downside, says Douglas Baird, a professor who specializes in bankruptcy at the University of Chicago Law School. The 363 filing "truncated the process, and gave people less chance to complain," he says.

 

"You can have a company in bankruptcy for four years, but the decision here was that 'we are better off solving problems outside of bankruptcy,' " he says.

 

Gerald Meyers, former American Motors chairman and adjunct professor at the University of Michigan Business School, says GM "never would have gotten out" of bankruptcy if the process had been "held hostage" to the deals. Given that the management team did not change, the biggest creditor (the federal government) wanted a speedy process, and the likelihood that most creditors would not be paid, a quick bankruptcy was the best process.

 

"Why spend time in court?" Baird asks. 

 

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