Next Steps in GM Turnaround Set
More job cuts and plant closings coming to GM.
by Joseph Szczesny (2005-10-18)
Struggling General Motors Corp. has put the company's crown jewels on the auction block as part of a broader restructuring of the company that includes a deal with United Auto Workers to reduce healthcare costs and a new round of plant closings.
Richard Wagoner, GM chairman and chief executive officer, disclosed that GM is prepared to sell a controlling interest in its storied and profitable finance arm, General Motors Acceptance Corp., which has been consistently been the most profitable part of the company for the better part of two decades.
The decision to put GMAC up for sale was driven by the precipitous decline in GM's credit rating, which is likely to continue in the wake of the company's dismal third-quarter financial report. GMAC's credit rating was downgraded right along with GM's to junk status earlier this past spring, making it harder for GM's big finance subsidiary to raise money.
Wagoner, however, didn't offer any kind of timeline for the sale and also suggested they want to review any offer carefully before moving forward. GM also will insist any purchaser operate GMAC as a stand-alone entity and enter in a close strategic partnership with GM's automotive business, he said.
John Devine, GM's chief financial officer, noted for potential suitors, GMAC is a strong vibrant business and any new venture with GM will have to be bold. Nonetheless, the reduction of GM's credit rating over the past six months has shaken GMAC and forced the automaker to review its options, Devine said.
Meanwhile, Moody's Investors Service, citing the potential for a shift in GMAC's ownership, changed its rating review status on GMAC to "direction uncertain" from a review for a downgrade. A "direction uncertain" indicates that ratings may be raised, lowered or affirmed. Ratings of GM remain on review for a possible downgrade, Moody's said. Fitch and Standard & Poor's also made nearly identical announcements.
Wagoner also announced that GM's cost-cutting efforts will get a substantial boost from the tentative agreement with the United Auto Workers that will help reduce the amount the automaker spends on healthcare for both employees and retirees.
"This is a huge move and we're glad to see it today,'' Wagoner said in a news conference at GM's Detroit headquarters at which the deal with the union was announced.
"We believe it is clearly in the best interests of UAW-GM active workers, retirees and their families,'' UAW President Ron Gettelfinger and chief GM negotiator Richard Shoemaker said in very brief statement issued several hours after Wagoner's press conference.
The changes are significant enough to announce that GM's future liability for retiree healthcare will be reduced by as much as 25 percent or $15 billion, Wagoner said. In addition, it also will reduce GM's annual cash outlay for health care by $1 billion annually, GM said.
Neither the company nor the union offered any specifics about the changes to the proposed plan but it expected to include larger co-pays and deductibles for almost all kinds of healthcare services as well as well a reduction in choice.
Wagoner also said GM is preparing to announce a major reduction in manufacturing capacity before the end of the year. The reduction in capacity will be in line with GM's plans to eliminate the jobs of 25,000 hourly workers by the end of 2008.
Wall Street analysts had expected some sort of deal with the UAW and generally reacted positively to the news. However, some suggested the healthcare agreement may not be enough to deal with the challenges from nimble Asian automakers and huge pension obligations, which are expected to swell with the addition of Delphi's unfunded pension obligations to the mix. In fact, in return for healthcare cuts, the UAW appears to have won an agreement from GM to take on even more of Delphi's post-retirement liabilities.
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