Bankruptcy Could Reduce GM’s Debt By 65%

Recently a J.P. Morgan analyst put forth the idea that a General Motors (GM) Bankruptcy makes more sense now then it did a few months ago, because the consumer has probably been desensitized to the idea after the recent government rescue of Chrysler and GM.  He also estimates that GM can reduce their debt by 65% by declaring bankruptcy, as opposed to only by 25% via an out of court restructuring.

When it comes to a GM bankruptcy I think the important metric is the magnitude of debt reduction, rather than the damage done to the public’s perception of the company. At the moment GM sells enough cars to be profitable, however their debts, labor agreements, bloated infrastructure, etc, don’t provide them with the efficiency needed to turn a profit. . Conceivably the company could cut their debts by 25% and still have trouble turning a profit, so it just makes sense to declare bankruptcy in order to get the maximum cost savings.

A 65% reduction in debt would go a long away towards making the company more efficient, and is probably worth the loss of market share

Furthermore I think the amount of damage to the GM brand from a bankruptcy is moot at this point because GM’s brand value is in the toilet anyway, how much brand equity can GM have when they’re selling cars at employee pricing, with heavy incentives, at a loss, etc, just to get them off the lots? Once you’ve established yourself as the low cost provider you don’t have much in the way of brand equity, because the marketplace won’t pay a premium for your product.

As a result now is probably a good time to declare bankruptcy and reap the savings from a major debt restructuring as the public’s perception of GM can’t fall much lower, and the company could probably leverage the bankruptcy related cost savings to be the low cost provider AND make a profit.

There is nothing wrong with GM being the Wal-Mart of the car industry as long as their operations are structured in a way that supports that business strategy, and bankruptcy seems like an avenue that can get them there.

Source:

Reuters: “GM bankruptcy could seed restructuring: analyst” — Jui Chakrovorty, February 09, 2009

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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