Tuesday, February 27, 2007

Detroit Dummies - Or, As David Argues, "Detroit Exec's Who Know More About It Than We Do"

This Stock Is Going To Zero
By Porter Stansberry
February 23, 2007

...GM is already bankrupt. Over the last 10 years, General Motors has been unable to make a profit selling cars. Its gross profits have declined by 46%, from $40 billion in 1996 to only $22 billion in 2005. It hasn't been earning enough money to pay for its overhead, capital expenses (upkeep of factories), or dividend payments. The result? An exploding debt level. In 10 years, the company's total liabilities have grown from $199 billion to more than $450 billion.

GM has been burning the family furniture to keep the furnace running. It has gone past the point of no return. General Motors will never earn enough money selling cars to repay these debts. In fact, the company cannot make enough money to merely service these debts. The final nail in the coffin came in 2005, when GM's credit rating was first downgraded to "junk" status. Since then, as its obligations have come due, the company has had to refinance at steadily increasing rates of interest. Its financing costs have soared. Over the last three years, GM's annual interest expense grew by 77%, from $9 billion to $16 billion.

GM can downsize, it can close factories, it can lay off union workers and renegotiate pensions. But its debts cannot be downsized. And its bondholders aren't going to settle for less than the full amount they are owed. GM cannot pay. Its shareholders will be wiped out, and its bondholders will end up owning the company. GM will be bankrupt within three years – or perhaps sooner if the economy slows. [...]

GM must spend $16 billion to $18 billion this year alone on debt financing and, with that burden, there is no way the company can make a profit. It's only a matter of time before the company goes bankrupt and the common stock goes to zero.

Which Road for Chrysler?
A buyout is all but inevitable...

by David Kiley and David Welch, with Gail Edmondson in Frankfurt

For the second time in a decade, Chrysler is on the auction block. Even more amazing, despite nine years of woe under the ownership of Daimler-Benz, Chrysler has a line of potential buyers forming to kick its tires. [...]

At DaimlerChrysler's (DCX) sprawling Stuttgart headquarters, the decision over how to proceed has split top management and board members into opposing camps: One backs a rapid sell-off of Chrysler Group, while the other favors first completing a restructuring effort into next year to bolster the selling price. A delay might reduce the final cost to Daimler of unloading Chrysler after subtracting its $22 billion in health-care liabilities. But the sell-it-now crowd appears to have the upper hand. "The chance that Daimler will sell Chrysler by fall of this year, before a new contract has to be negotiated with the unions, is probably 100%," says one senior DaimlerChrysler official who asked not to be named. [...]

It could cost [a potential buyer] $8 billion just to cut Chrysler down to size. And the company itself may only be worth $5 billion, according to Banc of America Securities analyst Ron Tadross. [...]

[P]rivate equity investors in Germany have been buzzing since 2005 about the chances of bidding for control of parent DaimlerChrysler. The allure? Investors figure they could break up the company and unlock big gains from Mercedes' luxury car and commercial truck units. Analysts estimated then that the Daimler parts were undervalued by as much as $40 billion when DCX shares traded at about 40.

The stock price has since risen to 75 a share, but raiders still see DCX as under­valued. "You dump Chrysler, spin off the truck business, and get Mercedes for free," says a German executive privy to the conversations. Michael Raab, an analyst at private bank Sal. Oppenheim, pegs DCX's breakup value at 98 a share. [...]

Private equity firms see substantial breakup value in Chrysler alone. The Jeep brand plus its factories could bring $5 billion to $7 billion. At least a few of Chrysler's plants would be of interest to Hyundai Motor, Chinese automakers, Renault-Nissan, India's Tata Motors, and possibly Volkswagen. DaimlerChrysler Financial Services, almost a forgotten asset, earned about $2 billion last year...


Blogger Duck said...

I'm glad my pension is through GMAC and not GM. You just know that the disintegration of GM and Chrysler will be fodder for the election campaign. I'm sure that candidates from both sides will toy with bailout plans. How many electoral votes are up for grabs in Michigan and the other rust belt states that are home to their plants? Ford is not looking all that blush either.

It's the end of an era. The UAW era. Nice going, chaps.

February 27, 2007 5:39 PM  
Blogger David said...

So now you're suggesting that the Germans, too, are simply idiots who can't see solutions that are obvious to any lay bystander?

February 27, 2007 7:15 PM  
Blogger Harry Eagar said...

Well, yeah, it's hard to excel the Germans in blind enthusiasm, isn't it?

Those plants aren't just in the Rust Belt. A lot of them are in the reddest of the red.

I lived in Iowa when the farm equipment business cratered in the '70s. The UAW was the biggest industrial union in Iowa, and maybe the biggest union period in the state in those days.

The farm equipment implosion was a pure move to offshore. The problem wasn't that the Japanese were making better farm tractors.

February 27, 2007 7:22 PM  
Blogger Susan's Husband said...

So now you're suggesting that the Germans, too, are simply idiots who can't see solutions that are obvious to any lay bystander?

Seems plausible to me. But there are a couple of more likely suggestions.

One is that there aren't any solutions and that is what the lay bystander can see that they can't, because the bystander isn't emotionally and intellectually invested in the current situation.

The other is that Daimler does see a solution — dump the Chrysler dead weight and fix their own boat.

February 27, 2007 7:51 PM  
Blogger Hey Skipper said...

The UAW is a rent seeking cartel with extortionate ambitions, and, apparently, the survival instinct of a splodeydope.

(I love that word, and aim to use it in a complete sentence at least once a day.)

February 27, 2007 8:48 PM  
Blogger Oroborous said...

The solutions are obvious - they're just not simple.

But, like the POTUS, Detroit exec's are being paid the big bucks because they're supposed to be able to cognate and implement complex or simply difficult solutions.

February 28, 2007 5:37 AM  
Blogger David said...

Harry: They are known for their innovative solutions.

O: I have no problem with the idea that at least some solutions to GM's problems are simple but difficult. Unfortunately, "difficult" here seems to include "illegal."

February 28, 2007 8:22 AM  
Blogger Harry Eagar said...

You mean like how they drove many of their best scientists out of the country in order to rectify their society?

In more recent history, I'm trying to think of a German innovation, but help me out. I'm comin' up blank.

February 28, 2007 9:19 AM  
Blogger joe shropshire said...

How could anyone have forgotten this breakthrough?

February 28, 2007 1:36 PM  
Blogger joe shropshire said...

More seriously, the farm equipment/heavy equipment companies may have picked the right decade to (almost) go under and to start breaking the UAW in the process. I'm thinking of Caterpillar in particular. Ingersoll-Rand also seems to be doing well, Navstar (formerly International Harvester) not so much although I am starting to see their long-haul tractors back on the road.

February 28, 2007 2:07 PM  
Blogger David said...

Well, they make better cars than we do and Germany and Italy are the world leaders in machine tools.

February 28, 2007 3:24 PM  
Blogger Harry Eagar said...

Everybody makes better cars than we do. That's the point.

I happened to be reading Medawar's essays last night, and he said, around 1982, that the Max Planck Gesellschaft and the Brits probably got the best bang for the buck in medical research. He was a smart guy, but I'm not coming up with any notable German medical breakthroughs in the last couple decades.

Is that true about Italian machine tools? I never heard of an Italian machine tool.

February 28, 2007 10:15 PM  
Blogger David said...

It's true. These people, for example, make a really cool manufacturing cell that will start with rolled steel or select the appropriate blank and then punch it, shear it and bend it without human intervention.

March 01, 2007 5:18 AM  

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