Bankruptcy for The General is The Answer

With GM’s stock value at its lowest point since the 1940′s and its revelation a couple weeks ago that it only has approximately three months of cash in reserves, something big is going to have to happen to save what was once the world’s largest automaker.  Since holding a market share in excess of 50%, GM’s share has dropped to just below 19%.

Talks have swirled in recent weeks about several scenarios.  We’ve seen discussions of bankruptcy, a merger with Chrysler and a federal bailout, to name a few.  While a merger with Chrysler might be a short term solution and would certainly be huge news, the merger wouldn’t necessarily address GM’s biggest problems. GM’s two biggest problems are that it has: a) an archaic pension program that no automaker could possibly afford, and b) too many unprofitable and inefficient divisions.  Unfortunately, a merger, whether with Chrysler or otherwise, wouldn’t address these issues.

I think the right answer is a Chapter 11 Bankruptcy, combined with some government “bailout” assistance.  Let me explain.  From my seat in the stands, those people that have been promised the most and will be hurt the worst from a GM collapse are its retirees.  These retirees were consistently promised that when they retire, they would be entitled to a significant pension.  If GM is no longer able to pay their pension proceeds, the fact is we’re going to have some significantly longer welfare lines in this country.  Additionally, these individuals who were promised pensions will no longer be able to afford proper healthcare, the cost of which will be a further drain on society.  I’m not big on bailing out failing companies, but if we don’t help out these individuals now, the problem will only compound itself in the future.  Thus, I would recommend that some portion of the bailout money be reserved to fund the pension of GM’s retirees.  Now for the bankruptcy…

Under a Chapter 11 scenario GM would be able to shed itself of many handicaps that make it uncompetitive in the current marketplace, and emerge as a streamlined company or companies that has a chance at profitability.  For one, under an 11 GM would get rid of the $1,600 per car that it currently has to pay for retiree pensions and healthcare.  ….Yes, I said $1,600 PER CAR!!!  GM sells around 9,000,000 cars per year.  You do the math; it’s no wonder they can’t compete.  Their cars aren’t that bad, they just have costs that are out of control.  GM would also eliminate a lot of its debt and union agreements; two other significant expenses for the company.  Finally, it is likely that unprofitable divisions of the company would be either shut down or sold off, resulting in a much more streamlined company.  Afterall, do we really need 3 or 4 different versions of the same car?  …think Cadillac Escalade, GMC Yukon and Chevy Tahoe — same vehicle, different badges, different marketing and lots of extra expense.  GM seems to do this with every vehicle.  This is nonsensical; if they would just focus on a couple of core brands they could be so much more efficient.  Instead of selling, for example, 5 Escalades, 5 Yukons and 5 Tahoes, they could combine them into one brand and likely sell at least 10 vehicles.  Granted the overall sales total is somewhat lower, but they would eliminate all of the costs associated with operating multiple brands.  …marketing, product design, production, etc.

Do certain people get hurt if GM files bankruptcy?  Absolutely – there will be layoffs and the trickle down effect to suppliers and vendors will be large.  On the other hand, GM is a broken company.  The business model is failing and they’ve burned through billions upon billions of dollars trying to fix it.  I hate the fact that it will put people out of work in the short-run, but unprofitable businesses just cannot operate indefinitely.  Now is the time to bite the bullet and address the core of the problem.  A federal bailout would just be another band-aid.  We don’t need to see any more of that.  Our bankruptcy system was created to address problems just like this.  It has worked for many other companies.  Let’s give it a chance to work for GM.

Now you ask “What does this have to do with Sports?  I thought this site was supposed to be about the nexus of sports and law?  Where’s my nexus?….”

Well, here you go.  If GM continues on its crash course toward complete collapse, the fallout will have a profound impact on the sports world.  Afterall, GM’s brands are some of the largest sponsors and advertisers in all of sports.  I’m not talking just about racing (that’s the obvious one), GM sponsorship is pervasive throughout almost all sports from Buick and Cadillac’s sponsorship of PGA Tour events to Chevrolet’s NCAA basketball scholarships.  Year in and year out GM is the largest television sports advertiser, spending nearly $600,000,000 per year, while its closest rival, Toyota, spends only half that.  To remove $600,000,000 in television advertising from the marketplace would most assuredly have a significant trickle down effect all throughout the sports and media industries which rely on sponsorships and advertisers for success.  In fact, some of the fallout is already occuring.  Earlier this year Cadillac backed out of its sponsorship of The Masters and GM has already stated that they will not be buying any advertisements in the 2009 Super Bowl broadcast.

Hopefully the General will heed this advice and move forward with a Chapter 11 in order to preserve the value of the company that is left.  If not for its shareholders and employees, then for all of those fans who enjoy consuming obscene amounts of sports programming thanks to sponsorships and advertising from companies like GM.