May 23 (Bloomberg) -- The 700 General Motors Corp. officials who
gathered in the beige ballroom of the Hyatt Regency Hotel in Dearborn,
Michigan, on April 14 expected to hear a warning shot from GM's top
management -- and that's exactly what John Devine, the chief financial
officer, delivered.
GM is just as vulnerable to economic upheaval as the U.S. airlines
and steelmakers that have already declared bankruptcy, Devine said.
``Time is not on our side,'' he said. ``The longer we wait to address
our cost structure, the more painful the solutions will be.''
It was one of dozens of ringing statements that Devine issued in
recent months as the company hovered on the edge of financial crisis.
The final push may have come on May 5, when Standard & Poor's
slashed GM's debt to high-yield, or junk, status.
The downgrade came after Detroit-based GM announced a $1.1 billion
loss in the first quarter of 2005 compared with net income of $1.28
billion a year earlier, as sales fell 4.3 percent to $45.8 billion. The
company's U.S. sales fell 4.9 percent in the first four months of 2005,
while rival Toyota Motor Corp.'s rose 13.6 percent.
GM shares sold for $32.98 on May 20, down 18 percent for the year.
``I've been short on GM shares for about a year, and I'm making a lot of
money,'' says James Melcher, president of investment management at
Balestra Capital Ltd. in New York.
Shares Sold Short
Fourteen percent of GM's shares were sold short, or borrowed and sold
in order to profit from falling prices, as of April 26. The figure was
the sixth largest among companies in the S&P 500 Index.
On May 4, Devine returned a call to GM from Jerome York, an adviser
to billionaire Kirk Kerkorian, who tried to take Chrysler Corp. private
a decade ago. York told Devine that Kerkorian's Tracinda Corp. would
offer $868 million for as many as 28 million GM shares.
If successful, the bid would more than double Kerkorian's previously
undisclosed stake to 8.8 percent, or 50 million shares. GM shares rose
$5.03, or 18 percent, to $32.80 on the day Kerkorian's intentions were
disclosed.
S&P cut the bond ratings on GM and its finance company, General
Motors Acceptance Corp., two levels to BB, making the world's largest
automaker by sales the biggest-ever company to have its debt rated as
junk.
Third-Largest Automaker
S&P also rated Ford Motor Co. bonds as junk, lowering debt from
the world's third-largest automaker by sales one level to BB+.
Fitch Ratings and Moody's Investors Service have negative outlooks on
GM, which means their ratings are more likely to fall than rise. Fitch
cut the company's rating to its lowest investment-grade level in March,
and Moody's dropped the automaker to that level on April 5.
The spread on GM's 8.375 percent bond maturing in 2033 was 690 basis
points more than comparable U.S. Treasuries on May 20, according to
Trace, the bond-price-reporting system of the NASD, formerly the
National Association of Securities Dealers.
Yield spreads for junk bonds in general were about 417 basis points,
according to Merrill Lynch & Co. (A basis point is 0.01 percentage
point.)
Devine, 61, who arrived at GM as CFO in 2001, has found himself at
the white-hot center of this financial firestorm. He got there after
losing a duel with Jacques Nasser for the chief executive officer job at
Ford in 1998.
Internet Startups
Upon leaving Ford, he spent two years wandering in the wilderness of
Internet startups. Now, says Eugene Jennings, a business professor
emeritus at Michigan State University in East Lansing, he may be in line
for the chairman's job if GM's directors decide that Rick Wagoner, 52,
isn't reviving the company fast enough. Wagoner is now both chairman and
CEO.
``John's a very competent person,'' says Allan Gilmour, 70, who
retired as Ford's vice chairman in February. ``Speaking selfishly, I can
say I wish General Motors had somebody who would be weaker.''
Since 2001, Devine has more than doubled to $168.4 billion the cash
and credit that GM and GMAC can spend to close factories or operate
during a sales slump. He braced for the lowering to junk status of GM's
$196 billion in unsecured debt by developing cheaper sources of funding,
including bonds that use car loans as collateral.
``John's given General Motors a massive amount of breathing room at a
time when its operating results will remain poor for quite awhile,''
says John Casesa, a Merrill Lynch auto analyst in New York. ``If he
hadn't, I don't know where the company would be today.''
`Like an Earthquake'
GM's woes, meanwhile, are reverberating around the world. The
company's March 16 forecast of a first-quarter loss sent investors
scurrying for the safety of U.S. Treasury bonds and pulled down stock
prices in the U.S. and overseas.
``This has been like an earthquake,'' Mohamed El-Erian, who manages
$20 billion of developing-nation debt at Newport Beach, California-based
Pacific Investment Management Co., told Bloomberg Television on April
19. Amid the confusion, El-Erian started buying bonds in Brazil,
Ecuador, Panama, Peru, Russia and Ukraine, where he felt underlying
economic strength had been overshadowed by GM's woes.
Scott Colbert, who helps manage $7 billion, including GM bonds at
Commerce Bank in St. Louis, says he expects a similar opportunity in the
wake of the GM downgrade.
After the company's March 16 profit warning, he sold GM bonds
maturing in 2009 and replaced them with bonds maturing in 2006.
Spread Surge
The shorter maturities helped protect him from a surge in the spread
on GM bonds above comparable Treasuries after the downgrade, which may
help force many mutual funds to sell GM bonds rated as junk.
The spread on GM's 8.375 percent bond maturing in 2033 rose 74 basis
points on May 5, the day of the downgrade.
``At some point, several weeks after the downgrade, you'll see the
credits snap back, and that would be a heck of a buying opportunity for
those who play in the high-yield space,'' Colbert says.
The bonds will snap back, he says, because Devine's cash and credit
hoard allows GM to keep paying yields higher than those of other
companies -- and because Devine's moves have eliminated the possibility
of a bankruptcy during the next 24 months.
Bill Gross, chief investment officer at Pimco and manager of the
world's largest bond fund, agrees. He told Bloomberg Television on May 3
that even junk-rated GM bonds may attract buyers. ``If the auto industry
survives for at least a few years, and I suspect it will, then the yield
on these securities is substantially in excess of lesser bargains in the
high-yield environment,'' Gross said.
`Winning Strategy'
S&P did GM a favor by classifying its debt as junk, Colbert says.
``It will force them to behave as the company they are, not the company
they were,'' he says. ``It will force them to recognize that being the
dominant player on the globe is not necessarily a winning strategy.''
GM hasn't reduced its size and its costs fast enough as Toyota and
others have gained market share, and it relies too much on large sport
utility vehicles such as the Chevrolet Suburban, whose sales have been
hurt this year by rising gas prices, Colbert says.
At GM's North American automotive unit, fixed costs for factories,
labor and new products amounted to 39 percent of sales in the first
quarter, according to a global telecast to employees by Wagoner on April
19. That was 4 percentage points higher than during the same period in
2003.
Cornerstone
To be competitive, GM would have to cut that percentage to 25,
Wagoner told employees. ``I even make John Devine nervous when I say
that,'' he said.
Neither Devine nor Wagoner would comment for this story. Devine said
during a Bloomberg Television interview on April 19 that GM could
continue to function as a junk-rated company.
``I wouldn't like to see a downgrade, but if it does happen, we're
not going to have to change our business model,'' he said.
The cornerstone of Devine's plan to keep the company afloat is a link
between GM and GMAC, which as a stand-alone company would have ranked as
the sixth-largest U.S. bank last year. GM drives customers to its
finance unit by absorbing as a marketing cost the added interest expense
of zero percent auto loans offered by GMAC.
During the first quarter, GMAC wrote loans and leases for 54 percent
of GM's 742,000 retail customers in the U.S. In return, GMAC expects to
pay the automaker a dividend in excess of $2 billion during 2005, Sanjiv
Khattri, the unit's CFO, told investors in Amsterdam on April 26.
Loans and Leases
When it was created in 1919, GMAC could raise money by selling
unsecured bonds, recycle that money into car loans and then use the
repayments on the loans to pay off the bonds and book a profit.
Under Devine and GMAC Chairman Eric Feldstein, 45, the finance unit
has become a more-complicated financial dynamo. To make sure its bills
get paid, Devine maintains $18.5 billion in cash and marketable
securities at GMAC.
During 2005, he has said, he expects to collect $77 billion from
people for whom GMAC has written car loans, mortgages and insurance
policies -- and to pay back $63 billion to the unit's creditors.
GMAC raised 32 percent of its funds by selling unsecured bonds last
year, a drop from 65 percent in 2001.
Unsecured Bonds
Asset-backed bonds rose to 33 percent from 21 percent, and the
outright sale of auto loans to banks rose to 13 percent of GMAC funding
from none in 2001. These so-called whole-loan sales totaled $6 billion
last year, and GMAC plans to sell significantly more during 2005,
Khattri told investors in Amsterdam.
After making, say, a $25,000 car loan, GMAC bundles the scheduled
repayments with those from thousands of other customers and sells them
to banks such as Bear Stearns Cos. or Citigroup Inc. It's a process
similar to the way mortgage companies sell home loans to Fannie Mae or
Freddie Mac.
GMAC is using the proceeds from the sale of its automotive assets to
expand its mortgage and insurance businesses, Khattri told investors on
April 26. GMAC derived 47 percent of its profit last year from
mortgages, insurance and non-auto assets. That compares with 23 percent
in 2002.
Because asset-backed bonds are guaranteed by loan and lease payments
rather than the issuer's own cash, they have better credit ratings and
require sellers to pay a lower yield. In its most recent bond sale, in
November, GM sold $1.75 billion of 6.75 percent notes maturing in 2014.
The yield paid to buyers was 270 basis points more than comparable
Treasuries.
Better Credit Ratings
If GM had raised this money through asset-backed securities, it would
have paid about 50 basis points more than Treasuries, says Karen Weaver,
head of asset securitization research at Deutsche Bank AG in New York.
GMAC is engaged in ``advanced talks'' to sell a stake in its
commercial mortgage unit, GM spokeswoman Toni Simonetti says. Having
outside investors, she says, will help the unit raise capital without
being hampered by GM's junk rating. GMAC tried to sell the unit two
years ago for about $2 billion.
The consortium of buyers with which GMAC is negotiating now includes
Kohlberg Kravis Roberts & Co. and Five Mile Capital Partners LLC, a
person familiar with the situation says.
To protect its residential mortgage business from higher borrowing
costs after a downgrade, GM announced on May 4 that it had reorganized
the unit into a separate holding company called Residential Capital
Corp.
Mortgage, Insurance
In his global telecast in April, Wagoner told GM employees that a
downgrade would make the money that GMAC recycles into car loans,
mortgages and insurance policies more expensive and harder to get.
``If we have a junk rating for GMAC over a continued period of time,
it's going to put some pressure on their ability to support auto
sales,'' he said. ``Their ability to grow will be compromised.''
The task of making sure that doesn't happen will fall to Devine, a
Pittsburgh cookie salesman's son who earned a B.A. from Duquesne
University in his hometown and an MBA from the University of Michigan in
Ann Arbor.
He joined Ford's finance department in 1967, and his big break came
in 1988, when Ford CEO Harold Poling named him president of the
automaker's San Francisco-based First Nationwide Bank unit. He had never
worked at a bank in his life.
Postmaster General
Ford had purchased First Nationwide in 1985. Under CEO Anthony Frank,
who later served as postmaster general for President George H.W. Bush,
the company tried to grow by buying failed savings and loan associations
from federal regulators. The plan backfired when regulators wouldn't let
Ford transform First Nationwide into a commercial bank.
In 1990, Devine had to boost his reserves for problem loans by $250
million. In 1994, he sold First Nationwide for $1.1 billion to Madison
Financial Inc., which was controlled in part by New York financier
Ronald Perelman.
``We could have broken it up and sold it in pieces,'' says Richard
Leweke, a human resources executive under Devine at First Nationwide.
``That would have produced the best financial result for Ford, but it
would have taken a lot of time and resources and may not have been in
the best interest of our customers and employees.''
Because of Devine's performance, Ford CEO Alex Trotman named him the
automaker's CFO six months after selling First Nationwide.
Financial Yardsticks
He made his mark by developing financial yardsticks that were easy
for diverse groups of design, manufacturing and sales specialists to use
when planning a new car, says James Schroer, then Ford's vice president
for global marketing.
Devine's methods for managing the balance among sticker prices,
rebates, subsidized loans, monthly payments and residual values were so
precise that they added a full percentage point to the company's profit
margin, Schroer says. That's a lot in an industry in which the most
profitable of the world's five-biggest automakers, Nissan Motor Co.,
reported a 10 percent operating margin in the fourth quarter of last
year.
``John's not a pushover, but he listens to different points of view
before forming an opinion,'' Schroer says. ``With a lot of these guys,
if you don't tell them what they want to hear, then that's an ugly
meeting.''
Management Turmoil
By the late 1990s, Devine had become caught up in Ford's management
turmoil. Trotman, concerned that William Clay Ford Jr., then 41, lacked
operating experience, tried to block him from becoming chairman. That
meant trying to keep Nasser from getting the CEO job as well because
Nasser and Ford were campaigning for the positions as a team.
Trotman championed Devine for CEO instead, people familiar with the
situation say. Trotman lost out, and Devine announced his departure from
the company five months after Ford became chairman and Nasser became CEO
in 1999.
After leaving Ford, Devine spent a year as chairman of Fluid Ventures
LLC, a San Francisco-based company that offered venture capital, real
estate and management consulting to dot-com startups. The company
started to collapse along with the Nasdaq Composite Index in 2000.
``John found himself managing a group of very bright, talented and
technically oriented people who were somewhat undisciplined in a
corporate sense,'' says Leweke, who's now vice chairman of Providian
Financial Corp. and who saw Devine socially during that period. ``He
found it interesting but bizarre.''
Popular on Wall Street
During his time at Ford, Devine had become so popular on Wall Street
that when General Motors hired him as CFO and vice chairman on December
13, 2000, the company's shares rose $1.44 to $53.19. The shares had
risen just 19 cents a day earlier, when GM announced the closing of its
Oldsmobile division.
Devine cemented his relationships with GM executives by demonstrating
his affection for cars as well as balance sheets. He owned two Chevrolet
Corvette and two Porsche sports cars.
When he complained of a sluggish response while turning the steering
wheel of a new SUV, Tom Davis, then group vice president for trucks,
told him a design change had already been ordered.
A few months after arriving at GM, Devine helped recruit Robert Lutz,
who had developed a series of hits including the Dodge Ram pickup at
Chrysler Corp. Lutz, 73, now vice chairman for product development at
GM, had been Devine's boss at Ford's European operations two decades
earlier.
Product Development
On March 1, Lutz was given control of all product development
programs around the world. He'll be using yardsticks developed by Devine
to make sure each family of new vehicles meets its targets for cash flow
and other measures on a global basis, not just regionally.
Devine has pushed executives as far down as plant manager to maximize
returns on investments and to minimize debt, in addition to boosting
profit and revenue. Operating cash flow is the easiest way to take a
snapshot of these results, so he recommended to GM directors that it be
a centerpiece in executive compensation.
Cash flow means income earned before companies have to pay interest,
depreciation and taxes.
During his four and a half years at GM, Devine has also burnished his
reputation for big-time deal making. In April 2003, he was the lead
negotiator when GM sold a 34 percent stake in Hughes Electronics Corp.
to Rupert Murdoch's News Corp. for $6.6 billion.
He had turned to Murdoch when antitrust regulators vetoed a prior bid
by EchoStar Communications Corp. that GM preferred. He also had to
contend with Hughes CEO Michael Smith, 61, the brother of GM Chairman
John Smith Jr., 67.
Lowest Interest Rates
Michael Smith, who favored a management buyout for Hughes and its
DirecTV satellite television service, publicly criticized an offer from
Murdoch as inadequate in March 2001. By the time Devine completed the
sale two years later, the value of Hughes shares had dropped 78.7
percent to $11.48.
To get the deal done, Devine had to help encourage his boss, John
Smith, to listen to other people besides his brother, a person familiar
with the situation says. John Smith, through a spokesman, declined to
comment. Michael Smith didn't respond to e- mails seeking comment.
In June 2003, Devine took advantage of the lowest interest rates
since World War II to sell $17.6 billion of bonds, the largest-ever debt
offering by a U.S. company.
Devine had worked with Morgan Stanley for two years planning the
sale, says Raj Dhanda, head of global debt syndicate at the bank.
Tactical Decisions
``Early on, we didn't have the type of momentum we might have hoped
for,'' Dhanda says.
Devine helped ignite demand with dozens of tactical decisions about a
variety of bonds that might appeal to different kinds of investors. He
authorized the sale of the first-ever 30- year corporate bond
denominated in euros, Dhanda says.
He sold bonds denominated in dollars and British pounds as well as
convertible bonds. He made three dozen calls himself to potential
investors such as New York-based BlackRock Inc. and Pimco.
Devine was also flexible enough to pay investors the right yield for
the risk they were taking, Dhanda says. On 10-year, U.S.
dollar-denominated bonds, GM's yield was 2.5 percentage points higher
than for the average U.S. corporate offering in June 2003.
Devine left his successors with the obligation to repay the bonds
when they mature, on average, in 2023. In June 2003, his subordinates
were celebrating at the GM treasurer's office in New York because they'd
sold a third more debt than they had hoped in just six days.
Crippling Burden
They had accomplished Devine's goal of lifting the crippling burden
of GM's unfunded U.S. pension liability. That liability stood at $18
billion at the end of 2002, even with payments of $4.8 billion during
the year. GM made no payments during 2004 and still wound up with a $3
billion surplus.
One of Devine's transactions has drawn scrutiny. In March, Delphi
Corp., GM's largest supplier, said it was examining its own accounting
for $85 million in credits received from GM in 2001.
GM issued the credits to help settle retirement costs the companies
had been untangling since Delphi was spun off from GM in 1999.
GM recorded the credits as an increase in liabilities on its balance
sheet, not as an expense that would have lowered earnings.
In an April 19 conference call, Devine defended the accounting as
proper, saying the credits related primarily to retiree health care
obligations that arose prior to the spinoff and that couldn't be fully
measured until the companies knew how many workers would actually
retire.
`No Enronitis'
So far, investors seem to be accepting Devine's view. ``There's no
Enronitis here,'' Commerce Bank's Colbert says. ``You're dealing with
quality folks.''
Enron Corp.'s bankruptcy in 2001 helped expose flaws in U.S.
accounting standards.
For now, investors even seem to be accepting Devine's decision in
April to abandon his earnings forecast for 2005. ``It's a smart move in
terms of their negotiating position with the United Auto Workers,'' says
Carol Moreno, a New York-based analyst at TCW Group Inc., which has $109
billion in assets, including 2.3 million GM shares.
The lack of guidance keeps the union guessing about the depth of the
company's financial woes and the magnitude of health care concessions
management might want, Moreno says. UAW spokesman Paul Krell declined to
comment.
`Great Value Story'
Moreno says she likes GM's annual dividend yield, which was 6.06
percent as of May 20. If the company cuts the dividend to encourage the
union to provide relief on health care, the savings would more than
compensate investors for the yield they're receiving now, she says.
The company has plenty of assets, including GMAC's residential
mortgage business, which can be sold during a crisis, Moreno says. ``GM
is a great value story,'' she says.
While engaged in continuous financial engineering, Devine has
maintained his own voice. He created a stir at a GM Christmas party in
2001 by saying he was in no hurry to spend $400 million for assets from
South Korea's Daewoo Motor Co. to form a joint venture.
``The longer it takes, the better,'' Devine told Bloomberg News at
the party.
At the time, Wagoner and predecessor John Smith were touting
alliances with companies like Daewoo and Fiat SpA as a way to grow
overseas with minimal investment. At the Christmas party, Devine voiced
a different view. ``Joint ventures are a bear to run,'' he said.
Diplomatic Skills
Devine's diplomatic skills won him a round of applause from union and
company leaders on April 14, at the meeting in Dearborn at which he
warned of crippling costs.
Even so, UAW President Ron Gettelfinger said he wouldn't reopen the
union's contract with GM before it expires in 2007. He promised to take
other steps to help trim GM's projected $5.6 billion health-care expense
for 2005 and other costs. Krell declined to specify those steps.
GM's only public hint of the concessions it's seeking came in March,
when Lutz said blue-collar union workers should pay the same
out-of-pocket medical expenses as salaried workers.
That would save GM as much as $1 billion annually if union retirees
were included, says Sean McAlinden, an analyst at the Center for
Automotive Research in Ann Arbor, Michigan. Salaried workers, for
example, pay $35 per prescription for so-called ``recreational drugs''
such as impotence treatment Viagra.
Cost Disadvantage
For UAW workers, the co-payment is limited to $25 for brand- name
drugs and $10 for generics.
GM's cost disadvantage to Toyota in North America totals $10 billion
annually, Devine told company and union officials on April 14. He said
that figure consists of $5 billion for health costs and wages, $3
billion for excess manufacturing capacity and $2 billion for ongoing
retiree and warranty costs at Delphi, according to people who attended
the meeting.
To lift the burden of those costs, GM must sell more cars, Wagoner
said in his April 19 telecast to employees. He laid out a set of goals,
including edgier designs, improved quality and lower sticker prices so
that big rebates won't overwhelm the rest of GM's advertising appeal.
He said that Cadillac and Chevrolet would get more new models and
that Buick and Pontiac would get fewer and would need fewer, because
their dealerships would be combined with those of the GMC truck unit.
Marketing Efforts
Wagoner, who took direct control of GM's North American units on
April 4, promised special marketing efforts in big cities like Los
Angeles, Miami, New York and Washington. He zeroed in on GM's Miami
market share, which runs from 12 to 14 percent, as unacceptable.
Nationwide, GM captured 25.6 percent of U.S. vehicle sales during the
first four months of 2005.
When he announced first-quarter earnings, Devine said the company was
engaged in sensitive talks with the UAW about health costs and overall
manpower. GM has already cut its U.S. hourly workforce to 106,000 at the
end of last year from 125,000 in 2003.
Even so, GM's 25 North American assembly plants are capable of
building 5.7 million vehicles annually, or a million more than the
company can sell, according to Michael Bruynesteyn, a Prudential
Securities Inc. analyst.
Of those 25 plants, eight are underutilized, he says.
David Cole, chairman of the Center for Automotive Research, says he
expects GM and its competitors to save money by collaborating more on
designing and building engines and transmissions. In December, GM and
DaimlerChrysler AG announced a jointly developed gasoline-electric power
system.
Toyota's Prius
They will deliver the system in cars in 2007, 10 years after Toyota
introduced a gasoline-electric compact car called the Prius.
Russ Koesterich, senior portfolio manager at Barclays Global
Investors in San Francisco, says he expects GM and Ford to struggle in
coming months with retiree health costs, rising gas prices and tough
competition from overseas.
Even so, Barclays bought 1.7 million GM shares in the fourth quarter
of 2004, bringing its total to 21.6 million.
``The valuations have become compelling,'' Koesterich told Bloomberg
Television on April 25. ``They're cheap on a relative basis, and they
offer an attractive yield.''
GM's 6.06 percent dividend yield compares with 2.04 percent for
S&P 500 stocks generally.
Written Off 2005
Merrill Lynch's Casesa says an inventory reduction of 100,000
vehicles in North America during the first quarter means that GM has
essentially written off 2005 from an earnings standpoint.
He says he expects the company to earn 50 cents a share this year and
$2.40 a share in 2006. By that time, GM hopes to benefit from a
redesigned family of 11 vehicles, including the Silverado pickup truck
and the Tahoe SUV, that in the past have generated $50 billion in
revenue and 1.5 million unit sales each year.
Higher gasoline prices, which reached a record of $2.28 a gallon in
the U.S. on April 11, have helped lower demand for such vehicles.
S&P analyst Scott Sprinzen said in a May 6 conference call that
additional downgrades are possible if high gasoline prices continue to
suppress SUV sales at GM or if GMAC links so many assets to securities
that it's selling that it won't have enough left to repay unsecured
bondholders.
Hostile Investor
Until Kerkorian came along in May, GM hadn't had a hostile investor
of any note since August 2000, when billionaire Carl Icahn announced
he'd spend at least $15 million for its shares.
Icahn walked away a few weeks later without disclosing how many
shares he'd purchased or at what price. He accused GM management of
sabotaging his bid by announcing it prematurely and thereby driving up
the share price.
Michael Losh, Devine's predecessor as CFO, said at the time that GM
management always understood they would be vulnerable to a hostile
investor if the share price fell below $60. The shares sold for about
half that on May 20.
Even at $32.98, GM's shares may be too expensive to attract a hostile
bidder today because of the massive restructuring the company will
require, says Brian Johnson, an auto analyst at Sanford C. Bernstein
& Co.
Potential investors from hedge funds and private equity firms still
aren't sure whether debt or equity would give them more leverage as GM's
crisis deepens, he says.
`Sharpening Pencils'
``There are people on Wall Street who are sharpening their pencils
and getting familiar with the situation,'' Johnson says. He declined to
name them.
If GM directors want to talk with private equity investors, they
won't have to go far. GM director George Fisher, 64, former CEO of
Eastman Kodak Co., is also a senior adviser at KKR. GM Director Kent
Kresa, 67, retired CEO of Northrop Grumman Corp., is also a senior
adviser for Carlyle Group.
Casesa says he believes GM's hand will be forced by higher borrowing
costs associated with the downgrade to junk as well as by weak
automotive cash flow.
He says he expects the company's automotive unit to consume $2.3
billion in cash this year compared with a decade-long peak in positive
cash flow of $4.9 billion in 2002.
As the consequences of weak cash flow manifest themselves, Casesa
says, GM's directors will be forced to consider selling the company's
main nonautomotive assets: GMAC's residential mortgage and insurance
units.
Those two units together are worth two-thirds of GM's $18.6 billion
in total market capitalization, Casesa says. Jerry Dubrowski, a GM
spokesman, says the company has no plans to sell the units.
Make a Choice
If GM directors decide to go ahead, Casesa says, they'll have to make
a choice between spinning the mortgage and insurance units off to
shareholders or finding a buyer and using the proceeds to repair the
company's automotive divisions.
To make that choice, they'll have to decide first whether there's any
hope that GM's automotive units can survive. That decision, Casesa says,
will be affected in part by the value of concessions GM can extract from
the UAW before or during 2007 contract talks.
Devine's ability to voice independent views without overt criticism
of the company hasn't gone unnoticed in the GM boardroom, says Michigan
State's Jennings.
``That's what directors like: people who'll stand up to them but
who'll do so in a way that's polite,'' says Jennings, who's advised
corporate directors in the U.S. for 40 years.
Jennings describes the GM board as relatively powerless because of
its decision two years ago to give Wagoner the combined titles of
chairman, CEO and president.
Devine Front-Runner
The board made that decision at the urging of John Smith, who retired
as chairman in 2003. ``How can a board be independent of management if
the CEO is also chairman of the board?'' Jennings asks.
If the GM board decides to reverse itself and split the jobs again,
Devine would be the front-runner for chairman, Jennings says.
``For Rick Wagoner, this is his last stand,'' says Sasha Kamper, who
helps manage $65 billion including GM debt at Principal Global Investors
in Des Moines, Iowa.
``If the board doesn't see progress in the next twelve months,
they'll go back to the drawing board,'' she says. ``Investors see Devine
as a bottom liner, as a guy who'll make the tough calls, so maybe it's
logical to expand his role.''
Even if Wagoner survives as chairman, Casesa says, Devine will be a
prime architect of any plan to rescue GM. He says the directors, as they
change forever a company that's been the world's largest automaker for
almost 80 years, will be certain to turn to John Devine and ask him what
he thinks.
To contact the reporter on this story:
John Lippert in Southfield, Michigan at jlippert@xxxxxxxxxxxxxx