When a company cannot move forward with profitable operations because of accumulated debt meaning they are not in a positive cash flow position, they must close the business and restructure. Either solution is costly. Restructuring with the protection of Chapter 11 of the US Bankruptcy code adds to the costs.
The cost of restructuring is not because of the people working to restructure or the bankruptcy court. The costs are generally a result of mistakes in the past. General Motors has access to many of the best and brightest in the world. With all this talent, they still managed to steer a company to bankruptcy. That is sad. How that happened will be guessed and reported on in many other articles and books. The purpose of this article is to give you a glimpse of what’s next.
In GM’s case, there has been an attempt to negotiate a structure for moving forward prior to the filing. An agreement was not reached. It is my personal view from being close to a number of restructuring opportunities that in many instances a rational solution is ignored. When that happens it often is because most everybody negotiating is an employee of somebody. Consequently the number one item on the agenda is “cover my ass.”
My turnaround and profit improvement work is often with privately held corporations where one or more people running the business are owners. Having held executive management positions (employee) with large pubic and private companies and having the experience as a business owner, I can assure you there is a huge mindset difference. The mindset of an owner is solution and action oriented. The mindset of an employee is “how do I get this done and protect my job”. Of course there are exceptions and most would say my mindset has nearly always been that of an owner whether I was one or not.
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Most of the restructuring of GM led by the company’s respective employees and advisers began prior to the bankruptcy filling p. Part of this included the company saying to the US Government “bail us out since certainly baseball, apple pie and General Motors is protected by the US Constitution” Our president (an employee who we hired) says OMG I can’t let the automobile industry crater. He and his subordinate employees throw a Hail Mary pass to fuel the restructure with a lot of money…our money. So the employees tell the owners of the money, the US citizens, how it will be spent and the owners (us) just shrug and say “OK”.
So the US Government steps in to the newly defined role of bailing out certain large companies and notice that the GM bailout did not avert a bankruptcy filing. So the brain trusts that run our country decide to send billions of our money to a company that months later files bankruptcy. Do such investments happen outside of Government bailouts? Of course. Investment funds make decisions all the time that don’t turn out as planned. The difference is that they are not using taxpayers money.
Taxpayers’ money is not the only money at risk. There are billions of dollars owed by GM that will never be paid back. The ripple effect of radically changed business is huge. Thousands of companies linked to the GM supply chain will go out of business or already have, since GM will cram down the money owed these unsecured creditors. They won’t be paid and they won’t have business fast enough to replace that lost. Of course the direct and indirect job loss is enormous. Again, don’t blame the restructure plan or the bankruptcy process. This situation is a result of how this company has been managed for decades.
The bankruptcy is necessary since not enough people agree on the latest restructuring plan promised to move GM to the land of profitability. So GM executives, advisers and others to benefit we will carve out a deal using the protection of Chapter 11 of the US Bankruptcy Code. This is a federal law designed to offer companies the opportunity to restructure and move forward profitably. Great idea except there are a few things you may want to consider:
Who pays for the bankruptcy filing?
Who always get paid during a bankruptcy?
Where is management’s attention during a bankruptcy particularly during the early phases of uncertainty?
Answers:
The administrative (accounting, lawyer, trustee) fees associated with any bankruptcy are enormous and the people who are owed money prior to the bankruptcy are the main contributors to paying these costs. For example, if a secured creditor is owed $10 million dollars, when the bankruptcy reorganization is filed, they may be offered 30% of the balance paid out over time depending on how much money is projected to be available . Think of a home mortgage. A bank holding the mortgage is secured by the value of the home. Normally that is good protection but if the bank loaned 110% of appraised value then the value dropped 30% the security does not cover the amount of the loan. It looks as if the bailout money given to GM is at high risk of not being paid back 100%. Time will tell. Unsecured creditors are not likely to get anything in a bankruptcy or pennies on the dollar.
The company pays for the costs of the bankruptcy process including filing fees, trustee fees, attorney fees and accounting fees. Of course paying for these costs means that money cannot be used to pay debt or suppliers. These costs are normally much larger than most people imagine. These fees are always paid. In some cases the court will require a reduction in fees charged but usually not.
A bankruptcy filing is very disruptive to normal business operations. The attention of management and ultimately many others is on what is happening with the case. This is particularly acute in high profile cases that are covered by the press like the GM case.
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Are Their Benefits To This Process?
The company’s regular business operations are protected while the case is active meaning creditors are not able to pursue lawsuits or size secured property.
A creditor’s committee will ultimately approve a reorganization plan. This plan is usually one with fewer assets than were in place before the filing since a lot of money will have been spent on bankruptcy related expenses. Generally the plan is similar to what the company wanted to do prior to the filing but had to file because people could not agree. Seems like once a company is in bankruptcy, employees who work for creditors are more likely to agree to a reorganization plan since they can always represent “well this is the best we could do as the company is in bankruptcy.”
Some company’s emerge successfully from this process and go on to restoring profitable growth. In General Motor’s case time will tell. There seems to be structural costs that will not be resolved in this case which are the labor costs driven by the union. Retirement benefits are being publicized as being a concern. Ultimately the company will determine what it is able to afford and changes will have to be made.
Ed Koch has been retained as the turnaround expert. His firm is very reputable and he has a number of notable turnaround successes. The one thing no one can predict with certainty is to what extent customers will want the product the company makes. The public has many choices and there may be too much resistance to this brand long term for any plan to be viable.
The media is already reporting the estimated impact of the bankruptcy on jobs and the economy. They are missing a key point. The impact is not from the bankruptcy. The impact is from how this company has been run in the past. The consistent implementation of a profit strategy has not been in place. From the outside looking in it seems the focus has been on preserving high paying jobs and lucrative benefits while placing secondary priority on innovation and a profitable infrastructure. If those priorities remain during and following this bankruptcy, the company will not survive.
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Steve Pohlit, The Profit Expert
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