By Covering Business March 3, 2012
By Julia Leite
Columbia Journalism School, C’12
After years of struggling with rising costs and competition, General Motors was in trouble. The automaker was quickly running out of cash to finance its routine operations, struggling with a heavy cost structure, which included a large number of products and high personnel costs Not even the $19.4 billion the government had poured into the company was enough to keep it afloat.
What a difference a bankruptcy makes.
Out of options, the GM filed for bankruptcy protection in June 2009 and started a restructuring process to get back on its feet. It was a move that would pay off.
Today, the new GM is riding the US recovery ahead of some of its competitors, who were not bailed out and still have to deal with their own debt. The company has fewer liabilities, more assets and an equity side healthier than its predecessor. Before bankruptcy, the company’s stockholder’s deficit topped $86 billion; by the end of 2010, it had swung to $36 billion in equity.
GM owes its remarkable turnaround to several factors.
When the company filed for bankruptcy, GM was given access to more government funds, immediately enhancing its cash position. The company needed it. Between 2007 and 2008, GM had seen the cash on its books fall from more than $24 billion to around $14 billion. However, by the end of 2009, financing activities and the erasure of $53 billion in debt had left GM with $22.7 billion in cash. (In 2010, its cash reserves fell again, to about $21 billion, without the government’s boost and with fewer proceeds from debt emissions and a growing deficit in financing and investing activities.)
GM’s costs and liabilities were also affected by the bankruptcy. After the company chose to focus on its four main brands (Chevrolet, Buick, GMC and Cadillac), it shed employees and dealers, and sold or discontinued lines like Saab, Hummer, Saturn and Pontiac. In its 2010 annual report (PDF), GM said it had saved $16 billion by cutting its automotive obligations. The company ended the year with $34 billion in automotive liquidity.
The recovery of North American auto demand also helped improve GM’s balance sheet. The auto industry’s U.S. sales rose to around 11.8 million in 2010 from 10.6 million in 2009. GM, the North American market share leader, sold 2.6 million core-brand vehicles in North America in 2010, up from 2.1 million in 2009. The jump was driven mainly by a 17% increase in Chevrolet sales,
Some improvements to GM’s balance sheet were the result of accounting. The company was allowed to report an asset of more than $30 billion in goodwill. This asset is normally the result of an acquisition premium, the difference between an acquired company’s fair value and what the buyer paid for it. In GM’s case, the goodwill was the difference between the fair value of items like employee benefits and income taxes and the value ascribed to them under accounting rules governing companies emerging from bankruptcy.
The bankruptcy also wiped out GM’s debt. The fresh-start reporting rules and the bankruptcy filing alone generated $128.2 billion in reorganization gains for the automaker between January and July 2009. This includes almost $34 billion in revaluation of assets with fresh-start reporting, a $31 billion gain from the conversion of debt owed to the Treasury department into equity and a $25 billion gain from the modification other employee benefit plans.
GM slashed its liabilities largely though a deal it made with its bondholders as it came out of the bankruptcy. In 2008, the company had over $29 billion in long-term debt, almost entirely related to bonds. By December 2009, after the company had filed for and emerged from bankruptcy, its long term-debt had been reduced to $5.5 billion. The company had swapped its outstanding bonds for future stocks, taking the bond liability off its balance sheet and sticking the bondholders with the loss.
Changes in postretirement benefits also helped the company cut down its financial obligations. GM scaled back its medical plans, capped some benefits and eliminated others.
In total, the company lowered its liabilities from $176 billion in 2008 to $107 billion at the end of 2009. In 2010, GM went public and repaid the government for its borrowing during the bankruptcy. That repayment reduced its short-term debt from $15.7 billion in 2008 to $1.6 billion in 2010 and cut its total liabilities further to $101 billion.
Now, after bankruptcy, GM is no longer struggling with debt, but further improvements to its balance sheet will not come as easily. Watching it over the next few years will reveal a lot about whether the company is able to keep costs down while still making cars people want to buy.
This article was written for the Columbia Journalism School’s seminar on business and economics journalism in the spring of 2012.
