Why GM Should Embrace Bankruptcy

Tom Krisher has a good overview of the travails at General Motors, where the stock is trading at a 50-year low, battered by speculation that the company might end up declaring bankruptcy.

Bankruptcy actually seems like a very good idea to me, since it might well be the only way for the company to implement the kind of radical reorganization which is necessary for any possibility of future profitability.

For instance: GM has eight - count 'em - brands, including marques like Pontiac and Buick which were instrumental in giving American cars a bad name, and which today get absolutely nobody excited. Heidi Moore wonders whether they might be for sale, and I'm sure that GM would love to sell them if it could, but the problem is that their value is almost certainly both large and negative. As her colleague Jeff McCracken explains:

The cost of buying out a dealer, given state franchise laws, is prohibitive. In many ways, the legacy costs of too many under-fed or under-invested dealers are as financially painful to Detroit’s auto makers as the legacy costs of its UAW contracts.
Chrysler several years ago paid handsomely to kill off the Plymouth brand. In a widely publicized move, GM pulled the plug on the vaunted Oldsmobile brand in 2000. GM spent $1 billion alone in 2001 to buy out Olds dealers and wind down some plants. Litigation with hundreds of Olds auto dealers drug dragged on for years and the final tally is estimated at close to $2 billion.
Ford has weighed killing its Mercury brand for years as well, but as a recently retired Ford executive once said: "That could cost close to $2 billion, or you could keep losing a couple hundred million a year. Given how your bonus is paid for this year’s performance, it’s easier to kick the can to the next person."

In other words, the dealers hold all the cards, right now, and are preventing GM from slimming down. But if the company were to declare bankruptcy, a lot of the leverage currently held by the dealers would evaporate; they would simply join the long queue of creditors.

Or there's another option. It might well be the case that the value of Chevrolet alone is significantly greater than the value of GM as a whole. So instead of GM selling off non-core assets like Saturn, why not spin off Chevrolet as a stand-alone company to its present shareholders? That way if rump GM ends up declaring bankruptcy they still have their shares in Chevy. That would surely be a better outcome than taking the meager proceeds from off-brand sales and throwing them into the black hole that is GM today.