Monday, 8 February 2010

Company Focus – General Motors – Pulling Back to Fitness, Preparing for Public Markets & Looking Far Beyond.

Although obviously not presently listed on the NYSE or other bourses, GM's intention to re-list as soon as practicable, predicates that investment-auto-motives maintains an overview of unfolding events.

GM has obviously been through major changes over the last 18 months, recast effectively as 2 companies – the 'new GM' and Motors Liquidation Co – with more recently amendments made at Board level with some of the faces that made up the 'American Industrial Establishment' moving-on, and replaced by others; the most significant of which was Ed Whitacre appointed as Chairman in June 2009.

By December he was appointed as Interim-CEO, and after reportedly a 2 month executive search for new CEO, Whitacre was named Chairman and CEO on 25th January. This then mirrors his dual role at AT&T – a role he kept for 17 years! Asked how long he would hold this dual-role, the answer was indefinite, but unlike AT&T, his primary role at GM is to cast the foundations internally and externally that prepares 'new' GM for a second coming on the public capital markets.

There has been criticism from the financial press that such dual appointments can make for over-authoritarian corporate regimes, the power-base centralised with the Board and senior executives given little more than implementation roles. Of course the counter-argument is that testing times, such as those now at GM, require definite leadership, the high ideals of consensus possibly leading to the worst of committee outcomes. Thus, it seems that Washington via the 'pseudo-czar' of Ron Bloom (now assisted from a labour-position by Ed Montgomery) has rightly encouraged the idea of 'The General's General', assisted by promoted executives and amenable work-force representation that enables the continued reformatting of GM. A reformatting that seeks in due course to excite the capital markets about a brighter, leaner, greener and globally competitive future.

Asked whether additional Presidential or COO appointments would be made, Whitacre stated that such roles would not be created. Thus a picture forms where Whitacre will be working in a partial, critically intentional, vacuum so as not to become embroiled in the everyday fire-fighting. Instead working as closely with Governmental officials and Wall Street bankers as he is with his own Board and top tier. This then, given previous IPO experience with AT&T, allows him to best understand what both these 2 primary exiting and entering stakeholders require from GM to administer a successful transition from state to private ownership. Relatedly, the promise to payback a slice of the government loan by June effectively reduces the government's share, thus simultaneously creating a greater portion of privately available GM equity. This then provides GM itself with greater decision-making freedom as to exactly how much equity it should offer versus self-held.

Thus far the GM recovery plan has seemingly gone well. Certain divisions sit in limbo awaiting sale, or have been so, within the 'invisible twin' of Motors Liquidation Co (ie Saturn, Pontiac versus Hummer, SAAB) and MLC's own volatile stock-price mirrors event-driven speculation.

Interestingly and appropriately GM has taken different vender-strategies with differing buyers, Hummer sold for a lowly $150m cash (possibly to aid US-Sino relations) whilst SAAB was sold to the consortium fronted by Spyker under a deal sees GM retain $300m worth of equity and take $74m cash. Given the technical-supply relationship a maintained stake was always expected, but what wasn't, was the high level of stake versus minimal cash received; thus ostensibly a paper-based deal.

GM's main focus however, has obviously been its domestic market and operations, with the dual benefits of a major 'weight-loss' bankruptcy filing chronologically superseded by the major aid of Washington's CARS scrappage programme – even if GM was not a primary beneficiary. Such surgeory and rehabilitationn has enabled a stabalising of NA market-share and, as Whitacre reports, achieved the metrics laid out by the internally stewarded GM viability plan. At exactly what level those performance metrics set, and by what degree they were bettered, remains confidential, but investors will require convincing of the self-generated leap made given the massive regulatory and fiscal assistance of the state, and the implicit nature of a seemingly coterie-coddled behind the scenes process as opposed to a commercially naked one.

However, for all the criticism GM has re-bounded well on the product front. The European devised Insignia, badged as Buick Regal in China and the NA, well positioned as a handsome lower exec sector affordable vehicle. The 2010 Astra exudes a matured distinction in the C-segment. The S.Korean (GMDAT) devised Chevrolet Beat (also badged Matiz, and Spark for Asia-Pacific) holds a youthful funky appeal to global markets (Euro and US markets from Q1 2010).

So top-line earnings look set to be boosted from a broad centre-ground yet meaningful market appeal.

In reality the US tax-payers money allowed GM to temporarily massage its business model, able to heavily discount its once sizable vehicle inventory, push stock onto dealers at reduced rates to shed production excess whilst re-aligning new vehicle supply capacity to match lowered forecast demand, yet theoretically maintain margins on new release vehicles such as Insignia and Beat/Spark. Thus it has been able to play both the unit-margins card in the D-segment in Europe and as a result of China-US exportation, and the volume-profit card in the B segment across regions, though the S.Korean Won has risen of late compared to previous ongoing weakness.

In mind of, but beyond, the currency effects of global operations, GM effectively seeks to re-invent itself as a right-sized, capable and prosperous modern car company.

Washington has done what it can, arguably far more than economically rational, to enable that metamorphosis. The Chairman and CEO is now tasked with stewarding the transition back to a commercially viable global entity. Once the extended scrappage schemes (eg UK's) that have kept the industry on life-support only those with buoyant balance sheets and attractive products will be able to fight for their respective share of the shrunken 'normalised' markets, and be able to maintain CapEx momentum.

Investors will want to see GM as a clean sheet company, having shed its remaining major operational issues; such as the arbitration filings by “some 500/600” NA dealers.

[NB that very approximate sum was uttered by Whitacre, demonstrating his somewhat removed position from the coal-face].

In contrast to the overtly relaxed, laid-back conference persona the top-brass of GM seemingly espouse, future investors will need substantive convincing that the 'massaged momentum' expected to be seen in financial statements over the next 6 months - as a precursor to the IPO - can be latterly maintained.

In sports parlance, GM's future, for investors and all stakeholders alike, must be considered as a long-haul marathon, not simply an IPO sprint. Today, GM pushes-off of the starting blocks with new vigor and presently less incumbered by a diminished competitor set. Importantly, the renewed Board hopefully offering fresh-thinking to bolster Walter Borst's Congressional promise, must look far beyond the attractive fluttering 'ticker-tape'.

That contention and possible dilemma is the core task that the now all-powerful Whitacre must balance. In this respect GM is a very different beast to AT&T – conglomerate divestment as opposed to conglomerate build, cost-cutting as opposed to competence building, erratic as opposed to stable capital market conditions and international competition as opposed to domestic focus.

Ed Whitacre's obviously astute knowledge of, and progressive introduction to GM, of the TelCo business model means that new GM into the future morphs into a very different beast.

[NB, as stated some time ago, investment-auto-motives conjects that one potential scenario sees the formation of 'GEM', with GE & GM creating a new 'Intel-e-Drive' division, possibly hastened via the acquisition of Chrysler's GEM electric car division].

Ed Whitacre mentioned a stay of two to three years, yet given Bob Lutz's oft return in what should be a stable, 'heir apparent' world of NPD, the mass revision of the complete GM business template indicates that Whitacre's stay looks set to be far longer than announced.