May 15, 2009

Hard Work Commences With Chrysler (UPDATED)

Chrysler bit the bullet and filed Chapter 11. Now, it has used the power of the Bankruptcy Court to cut through the Gordian knot of myriad state franchise laws protecting and effectively making permanent its ongoing commercial relationships with local dealers. Seven hundred and eighty-nine Chrysler dealerships have had their contracts with Chrysler non-renewed, effectively putting them out of business.

This is a very painful move. That's more than a quarter of all Chrysler dealers around the country. And the dealers are showing their pain by appealing to President Obama to make it stop.

But I hope Obama does not take the bait. The pain involved in the move does not mean that it is not necessary. More than half of these dealers sold less than a hundred cars a year. It costs Chrysler money and opportunity to maintain those franchise relationships. If President Obama is serious about making the American auto industry healthy again, he will let the Bankruptcy Court do its work.

And if he's really serious, he'll prod General Motors into Chapter 11 also. But the bankruptcy-that-isn't-a-bankruptcy GM is going through now is disgraceful, costly to the government, a leech on the public fisc, and to my eyes, not reasonably calculated to get GM moving down a road towards solvency and profitability:
To remake itself outside of court, GM must persuade its bondholders to swap $27 billion in debt for 10 percent of its risky stock. In addition, it must work out deals with its union, announce factory closures, cut or sell brands and shutter dealers. Swapping its bond debt for equity may be its most difficult task. The company is trying to get 90 percent of its bondholders on board for the so-called debt-for-equity swap. A committee representing the bondholders has rejected the swap, saying it unfairly favors the government and the United Auto Workers union. They have counteroffered seeking a 58 percent ownership stake, which the automaker in turn rejected.
Quit pussyfooting around, GM, and bit the bullet. You're not going to get that much of your debt swapped to equity without the hammer. And this represents a 147% dilution of the stock -- if you own $100 worth of GM stock today, and both those deals go though, that stock would then be worth $32 after the debt conversion and putting the union on the board of directors.

I remain skeptical that giving the union a majority stake in this company -- any company -- is a generally poor idea. (That's not to say that employee-owned companies cannot work, but employee-owned is different than union-owned.) Unions work best when they are not in bed with management. When unions capture management, the company gets run into the ground, which is part of the problem that GM is dealing with today and part of how it got to be that the stock is trading at $1.15 a share today.

Don't mistake this for me wanting to see GM be bankrupt. This is me wanting to see GM not be bankrupt anymore. It already is bankrupt and is using its political leverage to deal with that in a way that doesn't involve resort to the rules of bankruptcy. But there are rules to the game, the rules work, and the point of the process is not to be broke but rather to get to a point where profit can be made again and shareholders can regain the value which they've lost so precipitously over the past several years. Chrysler is taking a big step towards getting to that goal. And the longer GM waits to begin the process, the longer it will be until it gets out of it.

UPDATE: GM announced today that it will not renew franchises with about 1,100 dealers -- 18% of its network, responsible for 7% of its sales. Between the GM and Chrysler announcements, that's almost 2,000 auto dealerships, representing something like 150,000 jobs gone. Like I said this morning, painful. But no doubt necessary. My question remains, though -- why does Chrysler have to do this in a Chapter 11 scenario while GM gets to do it without judicial supervision?

No comments: