Monday, October 13, 2008

Past Time To Close GM and/or Ford, Chrysler

The current financial markets panic has hit America's two remaining publicly-held auto makers hard.

Seen nearby are Yahoo-sourced price charts for Ford, GM and the S&P500 Index. The first chart covers 1977-present, while the second chart displays the last three months' performances.

My first predictions of a major sale/failure in the automobile sector were in this post and this post, exactly three years ago this month.

In the first post, I wrote,

"Judging from where GM and Ford appear to be putting much of their energies these days, I’d say we’re going to be shy at least one major US-based car manufacturer before the decade is out. It may involve a merger among onshore rivals, if Congress is afraid to let so many UAW workers lose their jobs at once through a total financial failure of GM or Ford. But I'm willing to bet there will be one less automotive CEO in Detroit when 2010 dawns."

I took credit for calling the Chrysler private equity acquisition with that post.

In the second post, I wrote,

"Lest you think that Lee Iacocca’s Chrysler experience demonstrates that a Big 3 automaker can save itself, let me remind you that it ultimately was acquired by Daimler-Benz. Iacocca didn’t save Chrysler, he merely delayed its day of reckoning by a decade or so.

I continue to believe that GM cannot save itself because its current leaders, beginning with Rick Waggoner, are products of the existing culture of 40+ years. It is not capable of creating lasting, profitable change for the long term, within two years, in how it designs, builds and markets vehicles. It may be acquired, or “merge,” to avoid an actual bankruptcy. But I still maintain that it will not be independent within two to three years from now."

This time, however, with the Wall Street Journal and CNBC reporting on hush-hush merger talks between GM and Ford, then Chrysler, my fuller vision is quite likely to be realized.

As the accompanying chart of some 30 years of performance illustrates, Ford and GM, the only two US car makers for which we have uninterrupted equity price series, both began a long, slow slide around 1999.

With this financial crisis nearly cutting off all auto purchase financing, it's quite likely curtains for at least one of these firms. Over the period, GM has actually lost net value, while Ford has managed maybe a doubling of share price, unadjusted for considerable inflation. The S&P has returned in excess of 1000%.

S&P has put both companies on credit watch, suggesting they are in danger of bankruptcy. Since they are consuming $1B in cash per month, and financing of even good credits is expensive and more difficult now than only a few months ago, investors should understandably wonder if both Ford and GM can survive as independent, solvent firms.

In a discussion with a friend and former senior executive of AT&T and other firms, as well as a former board member of at least one large technology firm, we agreed that both companies probably cannot, and should not, survive.

We both saw the horrific excess capacity in the sector. When I suggested that what should occur is that the profitable, growing models in both companies' product lines should be sold to healthier auto firms, and the remainder of the companies liquidated, he concurred.

We both felt that economic aid should be given to displaced workers, but not the companies themselves.

Let's face it. For at least three years, all three firms- GM, Ford and the once-independent Chrysler- have been living on borrowed time.

How much better for their shareholders would it have been for each of them to pursue a sale of profitable operations, and the closure of ailing ones, at least three years ago?

As it is, Ford and GM have lost half their value since June. How much more would investors have been spared if reality were to have been faced much earlier?

At what point is a board at least civilly liable for continuing to operate a publicly-held company that simply has no reasonable hope of consistently-profitable operations in the future? Especially when it was so obvious that the sector had- and has- excess capacity, and that Ford and GM were the high-cost producers with the worst designs of the lot?

It's high time that the salvageable parts of Ford and GM were sold to an auto company which can afford to run them, while the rest of the operations are closed while there is a small amount of shareholder value remaining. Or, if none is, they won't be so large a drain on American taxpayers and the firms' creditors.

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