In 100 years strong legacy, almost 2,50,000 employees and over 16 million cars sold in 140 countries. All of that came to a grinding halt on June 1, 2009 as the world’s largest automaker American giant, General Motors (GM) filed for Chapter 11 bankruptcy protection in a New York court. GM’s collapse constitutes the world’s third largest bankruptcy filing after Lehman last year and Worldcom in 2002 and GM’s is the largest such filing in the manufacturing sector ever.
The GM failure comes a month after another American auto giant Chrysler filed for Chapter 11. Both companies are attempting a surgical procedure of fast track bankruptcy. It has been a historic month for America and the industrial sector world over.
In India, bankruptcy is a luxury reserved for the manufacturing sector. It’s all about turning sick, going to Board for Industrial and Financial Reconstruction (BIFR) and dying a slow death. Few companies survive the journey! Sure it has its flaws, but America’s bankruptcy code, especially Chapter 11 protection is designed to help companies get back on their feet. So ordinarily bankruptcies are no big deal in the US— but General Motors will go down in history for 3 reasons.
Reason No. 1 - From General Motors to Government Motors.
It was once said - what is good for General Motors is good for America! That’s become even truer because now America owns 60% of GM. When the world’s largest auto company emerges from bankruptcy, it will be the world’s largest government owned auto company.
Barack Obama, President, United States of America said, “We are acting as reluctant shareholders because that is the only way to will help GM succeed. What we are not doing, what I have no interest in doing is running GM.”
John Wolconowicz, IHS Global Insight said, “I believe the government is really overstepping its balance on this one but I believe they have to do it because the failure of GM at this point would be a real kick in the rear for the economy.”
Barack Obama said, “GM will be run by a private board of directors and management team with a track record in American manufacturing that reflects a commitment to quality and innovation. They, and not the US government, will call the shots and make the decisions about how to turn this company around.”
Kent Kresa, Chairman, General Motors said, “They have stated very clearly that they want to be involved in the process. So ultimately they make the decisions. They have made it clear to me that this is not a political decision, trying to get the very best people that we can from the industry who understand this industry and allow the company to be successful. But they have certainly the right and authority to make the final decision.”
Barack Obama said, “The Federal government will refrain from exercising its rights as a shareholder in all but the most fundamental corporate decisions. When a difficult decision has to be made on matters like whether to open a plant or what new car to make, the new GM and not the United States government will make that decision.”
Susheel Kirpalani, Partner, Quinn Emanuel said, ”There may come a time when there could be competitive forces that would enhance GM’s viability as we go forward that might be antithetical to US government policies.
Barack Obama further said, “Our goal is to get GM back on its feet, take a hands-off approach and get out quickly.”
Gerald Greenwald, Greenbriar equity group said, “If the management is really good and really energetic and convinces the Federal government that it is doing the right things to turn the company around, the government in my opinion will back away.”
Reason No. 2: It’s the largest cross border insolvency ever!
General Motors has manufacturing facilities in 34 countries and sells its vehicles in 140 jurisdictions Some of its global operations, for example, most of those in Asia, are run via independent companies that continue to be solvent and in good financial shape. Yet will the American parent’s bankruptcy filings impact international subsidiaries?
Fritz Henderson, CEO, General Motors said, “None of our operations outside the United States are included in the US court filings and these filings have no impact on our plans and operations outside the US.”
Daniel Glosband, Partner, Goodwin Procter said, “If it’s really an independent subsidiary so that the subsidiary wouldn’t go into default with its obligations in its own country, it shouldn’t be affected.”
Susheel Kirpalani said, “When a company that has assets aboard as well as in the US files for some sort of bankruptcy protection, the US bankruptcy will take the lead and in the foreign jurisdictions for example in United Kingdom (UK) or in Bermuda would file a provisional liquidation. A provisional liquidation is that the court recognizes that there may be a liquidation at some point in the future but we would like to take a breathing spell and allow the US bankruptcy case to continue.”
Reason No. 3: Speed! GM hopes to race through what it calls a surgical bankruptcy!
Bankruptcies are long drawn affairs. Lehman Brothers filed for Chapter 11 in September last year but is still stuck due to a dispute between Lehman’s American and British units over the distribution of assets. GM is over 3 times bigger than Lehman and present in double the number of countries - yet GM hopes to clear bankruptcy in 2-3 months.
Fritz Henderson, CEO, General Motors said, “The most important thing that needs to happen is we need to move fast.”
Susheel Kirpalani further said, “The old assets be it the Hummer division or Saturn division will remain back in the US bankruptcy estate in Chapter 11 case to be liquidated over time to the best and highest buyer that the estate could find. Once that occurs the cash could be gathered and distributed in a Chapter 11 plan to creditors in the US and abroad that hold interest in GM. That second piece or the resolution of the remaining assets or legacy assets of GM could take several years.”
Chrysler expects to be complete its bankruptcy proceedings in a month. So maybe GM can do it in 2. After all it has the President of the free world backing it and a superpower as majority shareholder! Years from now GM will be less remembered for its spectacular collapse and more for unprecedented government intervention— after all, nowadays, what’s good for America is good for General Motors!
Sources: ProfitControl and MoneyControl
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