Well, it's not as if we didn't see this coming. Still, yesterday's news that Standard & Poor's has decided to downgrade the debt of Ford (NYSE: F) and GM (NYSE: GM) to "junk bond" status shook the market. (Which market? Pick your fancy. They all suffered.)
To which, Foolish investors should reply: So what? Such short-term shocks to the equities system happen sometimes. Life goes on. The market goes back up. Contrary to what the investor relations, corporate communications, and ad-buying departments at Ford and GM might wish you to believe, these metal-machining dinosaurs do not define the American economy anymore. When they get shaken, and if they topple, sound companies may feel the reverberations, but being sound, these other companies will remain standing after the noise dies down.
But enough about the rest of us. There's a story to be told here, but it's a story about Ford and, most pressingly, GM.
Since fellow Fool Mike Cianciolo already told the story last month, I won't repeat it, but just summarize the highlights: GM is laying out huge sums of cash to pay its unionized workforce's salaries, to shoulder the medical benefits, to finance the pensions. And with its market share declining, it's simply not making enough cash to pay for all this. With its new "junk" status, the situation will only get worse. Institutions that are forbidden to invest in junk bonds will have to sell off their portfolios. They won't be able to buy new GM bonds when the company needs to refinance. And, of the institutions that can buy GM's junk, they'll be charging GM higher interest rates. In other words, the downgrade is going to increase GM's cost of doing business -- a cost it already can barely afford.
At this point, building better motorized mousetraps may not be enough to salvage GM. The time has passed for hanging all hopes on a battle for market share already lost to Toyota (NYSE: TM), Honda (NYSE: HMC), and Nissan (Nasdaq: NSANY). There's a reason the old saying doesn't go: "Desperate times call for. bigger cash rebates." What GM needs to do now is to engage in some truly desperate measures. Fortunately, a catalyst for that decision arrived this week, in the form of corporate raider Kirk Kerkorian's announced intent to up his stake in GM to nearly 9%.
Unlike smaller investors who might have been willing to give GM time to work out its problems, Kerkorian isn't likely to exhibit patience. He's much more likely to advocate radical change in Detroit. Change like accelerating or expanding already voiced plans to phase out a GM division. Or more inventive ideas, like selling one or more of these divisions to another company.
It wouldn't be unheard of, you know. Upon discovering it could no longer make desktops profitably, IBM (NYSE: IBM) did exactly that, selling the unit to China's Lenovo. The scenario doesn't look all that far-fetched when you consider that, by selling off a "Buick" or a "Pontiac" to, for example, Hyundai, GM could reduce its own labor and benefit costs, avoid laying off workers, save Hyundai the trouble of building a second U.S. factory, and pocket some cash to help pay GM's debts -- all in one step.
And from the perspective of GM investors, selling off a few underperforming bits and pieces of the 11-headed GM hydra would probably prove more popular than other solutions, such as canceling the dividend, issuing dilutive new shares to recapitalize, or filing for bankruptcy protection -- to name just three.
Fool contributor
Rich Smith
owns no shares in any of the companies mentioned in this article.
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