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GM's fate: A Hail Mary
The automaker has big problems, and a dividend cut won't fix them.
 NEW YORK (FORTUNE) - The General Motors board is meeting today, and Roman candles are likely to shoot from the meeting at some point. First, there's the question of the dividend, which may be cut by half or even be eliminated. A reduction is indeed the prediction of FORTUNE, in a cover article, The Tragedy of GM, that went to press last week and is coming out today. The article says that bankruptcy for GM (Research) is almost inevitable -- not tomorrow, certainly, but down the road a bit.
Cutting the dividend won't help GM's liquidity by a lot: Annually, the payout amounts to only $1.1 billion. But a cut would have the symbolic importance of telling GM's formidable union, the UAW, from whom GM needs concessions, that the shareholders are in the give-up game also. The biggest problem for GM in cutting the dividend is the headlines, certainly national and probably global, that will follow. These could agitate carbuyers who are already nervous about GM's viability -- who worry, for example (though the worry is needless) about the company's ability to make good on its warranties. The board did elect a new member today: Jerry York, adviser to Kirk Kerkorian's Tracinda Corp., which has a large, underwater position in GM stock. It is likely that GM's beleaguered CEO, Rick Wagoner, would welcome York's expertise on the board. York, in fact, is a veteran of two turnarounds -- at Chrysler and IBM -- and that might make his counsel especially valuable. The problem, though, is that GM, apparently worried about crossing a legal line, has for close to a year forbidden insiders to sell its stock. So is Tracinda both to have board representation and be entirely free to sell? That's a tough one. A home for GMAC
The other announcement that could come out of the meeting concerns the fate of General Motors Acceptance Corp., GM's major and very profitable subsidiary whose majority interest the parent has been trying for months to sell. The reason for selling is that GMAC's raw material is money and -- because of its scruffy parent -- it has been losing its access to its raw material. What GM and GMAC need is for a financially-strong buyer to come forth, one that by its very creditworthiness would earn good credit ratings for GMAC, too, and get it back in the commercial paper market from which it is now essentially barred. The problem here is that some financially strong enterprises -- such as major banks -- that would have made ideal buyers have dropped out of the race, with at least some of them concerned about ending up with a co-owner, GM, that could go bankrupt. The late bidders in this race have included private equity firms. And these folk do not have the full confidence of the rating agencies, such as Moody's and Standard & Poor's, which know that private equity operations have the habit of stripping cash from their companies and also selling them off -- "flipping" them -- after a few years of ownership. So it is a major question whether a deal that includes a private equity buyer will end up getting GMAC the strong ratings it needs.
Among the board members who will be huddling over these heavyweight issues are lead director George Fisher, ex-CEO of Kodak, and Stanley O'Neal, CEO of Merrill Lynch. One board member who got out of this mess by resigning last spring is A.G. Lafley, CEO of Procter & Gamble. Given that a GM bankruptcy would assuredly leave the directors with egg on their face, Lafley's exit might qualify as Shrewdest Move by a Director in 2005. |
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