Is This the New General Motors?

Lots of folks, including many Fools, still roll their eyes at any mention of General Motors. I can't blame them: The automaker has decades of quality and managerial sins for which to atone.

But more and more, today's GM looks to me like a different company. This post-bankruptcy GM is investing in bold new products, aiming not just to participate, but to lead in some of the industry's toughest segments, and showing impressive financial discipline.

The automaker still has a long way to go, but it's becoming clear that this isn't your father's General Motors. It isn't even last decade's General Motors. But with the company's IPO just a few weeks away, has GM done enough to convince investors to join its ride?

The latest in a series of un-GM-like moves
Various news outlets, citing anonymous sources within GM, have said that the company will launch its initial public offering before Thanksgiving -- "by November 19," said Bloomberg earlier this week.

Anything the company does in the next few weeks will be viewed through that lens, as it should be. Every company wants to have its house (and balance sheet) as clean as possible before going public, and potential investors should view any last-minute maneuvers with a skeptical eye. But the financial moves the company announced on Thursday deserve a closer look on their own merits:

  • A VEBA good move. A $2.8 billion payment to retire part of the company's debt to a UAW health care trust (often called a "VEBA"). Similar to a payment announced by Ford (NYSE: F  ) earlier in the week, the move is expected to reduce GM's ongoing interest payments significantly.
  • Getting some credit. GM has secured a $5 billion line of credit from a syndicate of lenders led by Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) . This isn't likely to be used any time soon, since the company has plenty of cash (almost $27 billion as of June 30). Instead, it's a rainy-day fund, one that potential investors may have insisted upon.
  • Another payment to the Feds. As compensation for bailing out GM, the U.S. government received both common and preferred stock. Most of that common stock will be sold off in increments once the company is public, but GM will be buying back the preferred stock early at a small premium. GM said on Thursday that it would pay a bit more than $2 billion, or 102% of the stock's liquidation value, to buy back the preferreds. This isn't just a patriotic gesture: Those preferreds paid a 9% dividend. Between this buyback and the VEBA payment, GM expects to save about $500 million a year.
  • Beefing up the pension plan. GM's salaried and hourly pension funds were actually well-funded until the market crash in 2008, when many of the funds' investments lost significant value. Now there's a hefty shortfall, and many potential investors have noted that it could become a big issue for the company in a couple of years. This is maybe the most uncharacteristic of GM's moves: It's confronting this issue head-on, in advance, promising a $6 billion cash-and-stock contribution shortly after the IPO.

All of these are sound moves, particularly given the company's cash position. But while new GM CEO Dan Akerson is known for his high-tempo style, it's hard to say at this point whether these are really characteristic of the new GM, or simply moves recommended by advisors like JPMorgan (NYSE: JPM  ) and Morgan Stanley (NYSE: MS  ) , the upcoming IPO's lead underwriters.

I'm leaning toward "new attitude"
On Thursday, GM announced a $190 million investment in a Michigan factory to tool up for a new small car. On the surface, this is just one of many similar investments that automakers make all the time, announcing spending (and new jobs) in advance of a product launch. Most don't generate headlines beyond the Detroit media.

But Akerson's tone made this one a little different. The small car in question, which is expected to debut sometime in the next couple of years, is a new Cadillac sedan aimed squarely at top-selling models from BMW and Mercedes. "We've ceded this segment of the market to our foreign competitors for far too long," said Akerson, according to the Detroit Free Press. Then he added a dig at Mercedes' compact sedan: "They call it the C-Class because it's very average."

Yikes. For a Detroit CEO, those are fighting words, ones that last decade's GM would never have been able to back up. But this is starting to look like a much more aggressive company. The real proof will unfold over the next few years, but I'm thinking that we might have to take GM a lot more seriously this time around.

Do you agree? Or is this all just window-dressing? Scroll down to leave a comment and let me know.

Fool contributor John Rosevear owns shares of Ford, which is a Motley Fool Stock Advisor pick. You can try Stock Advisor or any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (13) | Recommend This Article (11)

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  • Report this Comment On October 29, 2010, at 5:26 PM, csd128 wrote:

    It is my hope that someone will prove me wrong in my interpretation of a news story in this morning's Knoxville (Tenn) News Sentinel, where it is reported that, in advance of an IPO, GM is said to have lightened it's debt load by "repaying" some $2.1 B by buying back preferred shares held by the government.

    Is this new-age/voo-doo economics?

    If GM owes the government money, and a pool of money exists from which to draw funds, should those funds not be applied directly to the debt without receiving any other benefit?

    If GM has a pool of $24 B from which to draw, as reported, and it still has $60B in debt outstanding, does the money in this pool amount nothing more than borrowed funds from which they will make a "buy" that allegedly reduces it's debt?

    Do company's really not have to repurchase stock with profits nowadays?

    Is using funds borrowed from taxpayer's to make such purchases the SOP in today's business?

    Is this not akin to my getting stock in the bank that financed my home simply for repaying the loan?

    And I also note that Obama then wants to sell some of those shares in the IPO, presumably absolving We the People of some portion of the original debt, while funneling what may be uninformed investor dollars back to GM to replace the borrowed dollars originally used.

    New York has shell-game artists on street corners, we seem to have them in Guvmint Motors.

    Would this even be legal if you or I were to try it?

    There may be some winner's in a GM IPO, but it clearly will not be the taxpayer who basically remains unpaid of the $2.1 B, or the schmuck who gets stuck when this heavily indebted company's stock take a hit as the debt is called in.

    Buy at your peril; government is on the make for your dollars!

  • Report this Comment On October 29, 2010, at 5:30 PM, SMOKEN42 wrote:

    LETS REMEMBER, GM IS OWNED BY TWO INVESTORS.. THE U.S. GOVERNMENT AND THE UAW !!!!!!!!!!!!!!!!!!!!. WHAT A GREAT.....TRACK- RECORD ........THESE TWO ORGANISATIONS HAVE. GIVE ME A BREAK. ONLY THE BANKS, WHO ARE BACKING THIS I.P.O. WILL MAKE ANY MONEY, AND IT'S ALL UP-FRONT !!!!!!!!!!!!!!!!!!!!!

  • Report this Comment On October 29, 2010, at 6:53 PM, justingg wrote:

    Yes, I agree that retiring debt with more debt is not reducing it, rather shuffling it from one source to another. Hopefully for GM it is at a lower interest rate.

    This is just another way to build hype in investors who are ignorant.

  • Report this Comment On October 29, 2010, at 7:42 PM, csd128 wrote:

    I agree, justingg, but I cannot recall a sitting President directly participating in foisting such investment off on John Q.

    The One would seem to be quite comfy sitting with the "Churn 'em and burn 'em crowd".

    Says volumes for his integrity if he understands, and his intellect, if he does not.

    But then, he, just as was W , is really just a face on the party they serve, and ordinary citizens are nothing more than financial fodder for the games they play.

    At least Ford seems to be repaying w/ actual profits, and appears, at least for now, to be a turnaround success.

  • Report this Comment On October 29, 2010, at 9:20 PM, xetn wrote:

    You kind of forgot about the shaft the bondholders got during the take over.

    And that shaft means that there are no property rights, protected by law. Least we forget, bondholders are supposed to be the first paid.

    http://www.reuters.com/article/idUSTRE54L4S820090523

    http://www.washingtonpost.com/wp-dyn/content/article/2009/03...

    http://money.cnn.com/2009/05/26/news/companies/gm_bond_offer...

    http://www.freep.com/article/20090528/BUSINESS0101/90528082/...

    Contract law is nearly dead.

  • Report this Comment On October 29, 2010, at 9:26 PM, tem01 wrote:

    Guvmint Motors? Never in my portfolio!

    And I MEAN NEVER!!

  • Report this Comment On October 29, 2010, at 9:37 PM, Vmfrantz wrote:

    They still have the union. So I know it just the same ole same ole. Give the union a few years and they will put themselves in the same hole they are trying to get out of. Or should I say ditch and the Obama has to drive them out!!

  • Report this Comment On October 30, 2010, at 11:38 AM, aleax wrote:

    @csd128, you ask "Do company's really not have to repurchase stock with profits nowadays?" -- apparently not: Microsoft floated lots of bonds and will use the cash obtained via that debt to pay dividends and repurchase stock, and Mr Market cheered wildly; Form Factor (making losses, not profits, every quarter) is swimming in cash obtained by selling more securities and will be using some to repurchase stock; and so on, and so forth.

    After all, Franco Modigliani got the Nobel Memorial Prize in Economics in 1985, and Merton Miller in 1990, and many think their single greatest contribution to Economics was their 1958 "Modigliani and Miller theorem" showing that (under certain conditions wrt taxes, symmetric information, and market efficiency) it's indifferent whether a firm finances itself by equity, by debt, or by any mix thereof.

    So, no matter how you or I feel about it, this is hardly a new development (a 50+ years theorem that's taught in every single college finance course by now, I imagine!) and the "political" readings you guys all seem to want to place on it really unwarranted by quantitative finance theory (still, I sold all my MSFT on the market bounce observed when they announced they'd float bonds to pay dividends and repurchase stock -- that the maneuver's theoretically financially sound doesn't mean I have to be a party, with my money, to a scheme that, to me, stinks of financial alchemy and legal tax evasion;-).

  • Report this Comment On October 30, 2010, at 12:08 PM, gmworker50 wrote:

    GM is no longer "generous motors". GM came out of bankruptcy leaner and with a new attitude. Production has been consolidated to fewer factories, the reason for chosing the location for the new cadillac, to maximize output at each plant. On the plant floor supplies are carefully monitored.The two tier wage system that also affects the benefits of new employees will help GM lower cost for years to come. The no strike contract with the uaw that lasts untill Oct 2015.

  • Report this Comment On October 30, 2010, at 4:00 PM, csd128 wrote:

    aleax, thanks for your thoughful reply.

    Your comment about financial alchemy is spot-on.

    You are also generally correct in your observations, however, MSFT issuing bonds(presumably publicly traded bonds, that allow the buyer an opportunity to decline purchase) creates legitimate new debt to be repaid, with interest, from future profits, while GM, by using government funds that the public was literally forced to provide, seems to be getting a premium from the government over and above the benefit of any alleged resulting debt reduction.

    The politicians literally made us an offer we couldn't refuse! ....we had to loan 'em the money and now some magnanimous jerk is greasing them with free stock, just because they are paying back money to the people they took it from to begin with.

    It is a kickback, and a kick in the sack to taxpayers, but I realize it is Pollyanna-ish to expect politicians and (some) big business to rise above a clearly poor standard and apply even the most modest moral principles to things monetary.

    IMHO, it is such conduct that has gotten us to this sad economic point, and many reasonable, prudent, investors will not come back to the market until this and other, similar, questionable behavior changes, and that is just a bad thing for us all.

  • Report this Comment On October 30, 2010, at 10:31 PM, lowmaple wrote:

    Many blame UWA for chevy's(yes I said chevy) stupid business plan, but they at least produced something while the top brass were obviously not really working. The American taxpayer is once again taking it on the chin with an underhand swing. As a good Fool's principal of transparency I have no connection with any of the above parties.

  • Report this Comment On October 31, 2010, at 2:58 PM, ET69 wrote:

    To tell the truth, I was not interested in buying stocks in any car company but after reading all the anti union right-wing redneck idiot comments about the UAW I guess I will !

  • Report this Comment On November 01, 2010, at 12:42 PM, baldheadeddork wrote:

    John, if you were trolling for teabaggers you might want to reel them in now. The load on this line could sink a boat.

    The auto industry bailout saved a million jobs at the time when were were on the precipice of a total great depression. The Economist and even the horrible libertoonian business writer Megan McArdle have admitted their opposition to the bailout was wrong. ( http://www.economist.com/node/16846494 ) But good luck getting the talk radio crowd to buy it. This will go down like the bankruptcy and failed bailout of Chrysler in 1980 - something everyone knows happened even when it didn't.

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