GM and Chrysler Hubris

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A bankruptcy follows a set course  in the bankruptcy code.  Are you a farmer?  Are you a liquidating business?  Are you restructuring?  There is a route through the code for every type of debtor.

In a liquidation everything is sold and the proceeds are distributed at pennies on the dollar to the creditors.   In a restructuring the creditors and the court design a plan to fix the financial or legal issues that the debtor can no longer solve alone.  But the outcome of any restructuring is that the business ought to hit the ball out of the park for a couple of years.

If the controlling debtors, management, and the advisors have done their job correctly the business should out perform their initial budgets.  A restructuring with an otherwise profitable business weighed down by foolish debt or burdened with overwhelming liability from a lawsuit, emerges from bankruptcy with much less debt and without the liability.  All the company profits that pre-bankruptcy went to interest and fees are now free cashflow for investment or dividends.

So as we listen to the President and the Vice-President brag about the auto bailouts, I wonder if they have spoken to their bankruptcy counsel?  The post-bankruptcy balance sheet can make a bankrupt an attractive acquisition.  Some companies are able to start a permanent march to prosperity.  But another common trajectory is for the company to do well for a couple of  years, then plateau and decline.  A subset of those return to bankruptcy.

The political race in Michigan appears over – the President is going to win.  Perhaps in Ohio the auto bailout will prove pivotal in those crucial swing counties in Ohio that have figured so prominently in past tight prior elections.  But in 2014 in the mid-term elections there is no guarantee GM and Chrysler will still be performing.  The same story the President and Vice-President tout on the campaign trail sets up a brutal attack if GM and Chrysler without real long term strategies slip backwards.

Within a year or two the “sandbagged” budgets upon which the restructuring was based will no longer apply.  New rigorous budgets based on growth and meeting financing commitments may begin to bite into performance.  Without a strong strategy the breeze that a well run restructuring puts into a company’s sails fades with time.

Perhaps the President and Vice-President locked in a tight re-election cannot afford to be cautious.  But it is a risky proposition to base your re-election even in part on a restructuring.  These were two deeply flawed companies and while their balance sheets are much improved it is not clear their business strategy is much different.  It is even possible that in an era of rising gas prices they may stumble badly  before the Presidential election.  But it is even more likely that the favorable winds will dissipate sometime after this year in time to set up a different story for 2014.

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