Ben Margot  /  AP
GM on Monday announced a “red-tag” sale, and new profit-eroding discounts, that will allow anyone in the United States to buy vehicles at the same price employees of GM’s auto suppliers pay. staff and news service reports
updated 11/17/2005 12:56:26 PM ET 2005-11-17T17:56:26

General Motors Corp., despite efforts to turn around its ailing business, continues to get knocked around by analysts, investors and consumers.

The automaker's shares weakened further on Thursday, whittling down the market capitalization of the world’s biggest carmaker to less than $12 billion.

At Thursday’s open, GM’s market cap, or the aggregate value of its stock, stood at $11.9 billion, compared with Google Inc.’s almost $112.5 billion and less than longtime rival Ford Motor Co. at $13.6 billion.

The Detroit-based auto maker’s stock fell to an 18-year low of $20.90 Wednesday on concerns about GM’s financial hurdles, a possible bankruptcy filing, and a showdown between the United Auto Workers and management at bankrupt Delphi Corp., a key parts supplier and former GM division.

An alliance of Delphi’s union workers, including the UAW, is girding for a battle against the company’s aggressive cost-cutting plans. On Wednesday, they said the company’s latest contract proposal is “not a framework for an agreement but a road map for confrontation.”

Another drag on the stock: Intense pressure on Rick Wagoner, chairman and CEO of the company, to improve the company's business.

Still, a story in Thursday’s Wall Street Journal said that, despite rising pressure on Wagoner, he continues to enjoy the support of the company’s board. But large institutional investors and analysts want to hear more from GM and say the board bears some responsibility for the woes.

This year alone, the car maker has lost almost $4 billion, shocked investors with earnings restatements, seen its stock plunge to new lows, come under investigation by federal regulators and lost significant U.S. market share to foreign rivals.

“When Wagoner took over for GM North America, he essentially implied that it was all on his shoulders now,” T. Rowe Price analyst Brian Ropp said. “By taking on that role, he took full responsibility for North America, where the key issues are. And things have only gotten worse.”

Wagoner rose to the helm of the company in 2000 and took control of daily operations at its struggling North American unit in April 2005.

The company has been hurt by slumping sales of its large sport utility vehicles as high gasoline prices have made the longtime cash cows less popular. GM is also grappling with high health-care and commodities costs.

New incentive program
GM on Monday announced a “red-tag” sale, and new profit-eroding discounts, that will allow anyone in the United States to buy vehicles at the same price employees of GM’s auto suppliers pay.

“Their cost structure isn’t changing,” Ropp said. “The new incentives are just bringing down the top line and killing margins which are already negative.”

GM’s October domestic sales slipped 23 percent in the absence of new incentives following a highly-publicized summer employee discount program, which pulled many potential car buyers into the market earlier than they might have been otherwise.

After its “employee discount” program ended in August, GM launched its “value pricing” system, a process that brings sticker prices closer to transaction prices, thus narrowing the room for any bargaining.

“The move to value pricing offered [price] declines that just weren’t great enough to attract buyers,” Argus Research Group auto analyst Kevin Tynan said.

“Under the value pricing system, on average, the sticker prices are down a couple hundred bucks. To be effective, value pricing has to be four times that, and incentives required to sell vehicles must be removed,” he said.

Betting on bankruptcy
An increasing number of investors are betting that GM may be forced to seek bankruptcy protection within the next 12 months.

Concerns about the automaker are showing up in the credit default swaps market, where investors effectively buy insurance protection against defaults. Holders of GM debt who want to arrange a hedge against the risk that they won’t be repaid are finding that the cost of buying the protection has risen dramatically in recent days.

“The markets are telling you that more traders are starting to see a greater risk that a default scenario could happen sooner in time than later,” said John Tierney, a credit strategist at Deutsche Bank Securities in New York. “You cannot deny there is a pattern here.”

GM spokesman Jerry Dubrowski responded by saying the automaker has “no plans to declare bankruptcy,” and he noted that GM has about $19 billion in cash on hand. Beyond that, he declined to discuss recent pricing trends for credit default swaps. “Typically we don’t comment on stock prices or bond prices,” he said. “We don’t think it is appropriate to do that.”

Billions in debt
At issue is the nearly $31 billion in debt related to GM automaking operations that ratings agencies already have downgraded to junk status, or below investment grade. Dubrowski said GM’s total debt, including debt sold by its General Motors Acceptance Corp. unit, now stands at $276 billion.

Credit default swaps for GM are now trading at what is known as an “upfront” basis, meaning a bondholder seeking protection against a default has to pay more money up front because the Wall Street firms arranging the hedges have to pay more to protect themselves.

Michiko Whetten, a quantitative credit analyst at Nomura Securities International Inc., said GM debt had previously never traded on an upfront basis. But now that it is, it puts GM in an unenviable category with Delphi Corp. and Delta Air Lines Inc. — other companies whose debt traded on an upfront basis ahead of their petitioning for bankruptcy.

Auto parts maker Delphi, once owned by GM declared bankruptcy in October, and Delta, the nation’s third largest carrier, went bankrupt in September.

A report in Thursday’s Detroit Free Press said Delphi demanded 24,000 hourly job cuts over three years — a plan which union leaders refuse to even submit to the company’s workers for a vote.

The newspaper said the job cuts — which would eliminate about two-thirds of Delphi’s union workers — would be coupled with steep wage cuts under the company’s plan, which greatly increases the chances of a strike by the United Auto Workers and other unions.

The Associated Press and Reuters contributed to this report.


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