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General Motors (GM)
Should General Motors Raise the White Flag?
When auditors of Deloitte & Touche assessed General Motors' financials, they issued a "going-concern" warning. This means that auditors are not sure if the company will have enough money or resources to stay afloat. This sent shares down below the $2 threshold in Thursday's trading session. The decline continued into Friday's early morning trading when its stock price fell as low as $1.60. Clearly, the only reason the company has been able to avoid bankruptcy was due to the government bailout funds provided to the company. However, they still seemed inadequate in preventing certain doom, and many are expecting the company to file for Chapter 11 protection anyways. However, should they really declare defeat?
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Yes. Facts and events tip towards a solid yes. The reason the company wanted to avoid Chapter 11 in the first place was because they did not want to scare consumers into buying cars manufactured by rivals. What they failed to realize however, is that consumers were buying competitors' cars for reliability reasons, not because of the financial state of the company. Why? Because of gas efficiency, the increased popularity of "going green," safety ratings, value, etc. This is not to say that General Motors produces bad cars, rather, that they have fallen behind others in appealing to consumers. For example, Toyota (TM: Charts, News, Offers) and Honda (HMC: Charts, News, Offers) are two name brands associated with value and good gas mileage. Even American rival Ford (F: Charts, News, Offers) is doing some rebranding -- a move that has proven effective in winning consumer approval. Reorganizing under bankruptcy will allow the company to be safe from creditors while they change their structure and product lineup. It is also more effective than government bailouts because it allows them to rework all of their debts. This will be better than reworking some or even most of their debts with costly government funds.
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While GM may not be known for having the highest quality vehicles, they do have a quality brand name. Bankruptcy will allow them to recapitalize on this and when they finish doing some back-end work, they can reemerge stronger. However, company attorneys and analysts feel otherwise. They fear that bankruptcy would tarnish their reputation and prevent buyers from ever coming back. However, consider this: assuming you had money, would you buy a GM vehicle today versus tomorrow if they declare bankruptcy? In either scenario, most people would probably have the same answer. And the answer will probably be yes to a purchase, considering the government's decision to provide bailout funds to the car-manufacturer is proof that the American public is reluctant to let the car-manufacturer fail. Therefore, it may be better to let GM slip and fall so it can come back stronger.
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On the opposite side, the people who would be hurt the most from bankruptcy would be creditors, investors holding shares of the company, and individual employees. Unfortunately, this accounts for a large number of Americans. Bondholders and other creditors are expected to make some concessions given that their debts would be worthless if the company collapsed, and investors would hold shares that would have trouble affording a McDonald's (MCD: Charts, News, Offers) Happy Meal. However, the employees will be the ones hurt the most because they would probably face pay cuts or jobs cuts altogether if the company shrinks its size and capacity.
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Thus far, the company has borrowed $13.4 billion from the US government but is asking for up to $16.6 billion more. This is aside from the 3.3 billion Euros ($4.2 billion) it is asking for from the German government. While the company still wants to avoid bankruptcy, they will probably need to bite the bullet in order to reinvigorate themselves. Many top analysts are seeing the events leading up to now as a sort of "prepackaged bankruptcy." If they go through with it, they will be relieved of colossal financial obligations and really be able to restart from square one. Their current stock price is also low so if they decide Chapter 11 is the right choice, the consequences today would not be as bad as it would have been in 2008. All this said, maybe now really is the time to pull the plug while everybody is prepared.
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