Today is Monday, May 21, 2012


Sell GM, Ford and Chrysler assets to new company for pennies on the dollar

Detroit-based auto makers should be liquidated so that their assets can be sold to a new company for pennies on the dollar and so that thousands of jobs and careers can be saved.

Bailing out or reorganizing General Motors (GM), Ford (F) and Chrysler makes no sense because their corporate cultures need to be replaced by a new corporate culture that can thrive in the 21st Century global auto markets.

Thus, all three companies should be forced to declare Chapter 7 bankruptcy under new Federal legislation that would give a new American auto maker or auto makers the first rights to buy the assets it or they want from the three companies’ bankruptcy trustees. After the new company or companies bought the intellectual and hard assets they thought that they could use to build viable, competitive enterprises, the rest of the assets could be sold to other auto makers and bidders.

The new company would start with a clean slate and would become the Southwest Airines (LUV) of the auto industry. It would not assume any of the debt, retiree benefit obligations, union contracts, dealers or vendor contracts that today make it impossible for a Detroit-based auto maker to produce and sell vehicles in competition with foreign-owned American auto plants and their more than 114,000 workers. And the new company wouldn’t be encumbered by the dysfunctional corporate cultures and dead wood that are helping make GM, Ford and Chrysler so complex and unmanageable.

A new company could assume the name of GM, Ford or Chrysler, the discredited Ancient Three. Or they could or start fresh with a new one, say for now, NewCar, which gets 72.8 million hits on Google.

With government backing, which would take an act of Congress, NewCar would hire based on merit and potential, not based on seniority, sex, race, religion, ethniticity, age, disabilities or political convictions or affiliations. This means some smart, wise senior auto industry executives and managers would get jobs and some experienced, worn out, disabled factory workers wouldn’t. Life ain’t fair, but this is about the future. More about the losers below.

NewCar would cherry pick 1,000 to 2,000 of the best auto dealers out of the surplus of 7,000 now selling Detroit products without having to worry about breaking any state or federal laws or contracts with dealers.

Vendors would compete to supply NewCar. The best would thrive, the rest would not.

The buyer or buyers most likely would be a private equity investor or venture capitalists who knew how to raise $30 billion and take a new company public immediately or in a few years.

The political reality is that auto industry workers who weren’t hired by NewCar would have to be taken care of by the Feds and states. If the government bailed out the companies, they’d effectively bailout the United Auto Workers and its members in the process. It would be cheaper to just bail out the workers who didn’t get hired by the new auto maker than to bail out the Ancient Three and UAW. Undoubtedly, the politicians would come up with a generous safety net and retraining programs for unemployed auto workers and union leaders.

Since President-elect Obama is going to nationalize the health insurance markets anyway, auto industry workers who lost their jobs and weren’t hired by NewCar, its dealers or suppliers would have health insurance. And the government would pickup the cost of paying them their pension benefits. Workers who were hired by NewCar wouldn’t have their pensions picked up by the government.

Dealers who didn’t make the cut with NewCar could be at least partially bailed out by the Feds, but the government really shouldn’t have to bail out dealers any more than it bails out investors in failed restaurants, hotels, distributors, retailers, hospitals or airlines. There just are too many dealers, and thousands need to close.

Whether the UAW would have a role would be up to NewCar’s management and workers. Considering Obama’s obligations to the unions, the company probably would be unionized, but a new contract would be much more workable than any existing auto industry contracts.

Ultimately a new auto maker would operate much more efficiently and would be very price competitive selling two or three of the top brands now sold by GM, Ford and Chrysler through an appropriate number of dealers. It would be up to the company to decide which brands it would make and sell.

How would a transition from the failing auto makers and a new company work? Anyone smart enough to take advantage of the opportunity to start a new auto maker from scratch for 10 or 20 cents on the dollar should be savvy enough to figure that out. I haven’t even tried to think about that, but I’m sure the problem could be solved.

The questions then are: How could such a plan be sold to potential founders of NewCar and to the politicians who are deeply in debt to the UAW and other unions? Who would want to start an auto maker and would have the resources and expertise to do so? How long would it take to start a new company, and how could it be done without shutting Detroit down for more than a few weeks?

I’m still betting that power-hungry politicians and union leaders will find a way to use government money to extend the lives of the obsolete and uncompetitive Detroit auto makers, but shareholders will be wiped out.

Congress should hear not only from the Ancient Three but also from the potential founders of new companies that would buy their assets. NewCar’s founders probably won’t be heard for obvious political reasons. And it’s unlikely that anyone is seriously considering starting an auto company.

So this is just an interesting exercise for a new GM shareholder who’s taking a bath on his tiny speculative covered call trade in a failing company’s stock.

Links: GM’s putting together a restructuring plan. Bloomberg.

Bailout proposals will lead to trade agreement problems for U.S. Bloomberg.

Citigroup maintains sell rating on GM and Ford. Streetinsider.

Auto industry planning PR push. Detroit Free Press.

GM and Ford probably won’t be forced into bankruptcy. I’m less confident of this prediction this week. Businessword.com.

For educational purposes only. Investigate before you speculate. I am not recommending any trades and take no responsibility for how others trade stocks, ETFs, commodities or anything else.