General Motors Corp filed for bankruptcy on Monday, forcing the 100-year-old automaker once seen as a symbol of American economic might and dynamism into a new and uncertain era of government ownership.
The bankruptcy filing is the third-largest in U.S. history and the largest ever in U.S. manufacturing.
The decision to push GM into a fast-track bankruptcy and provide $30 billion of additional taxpayer funds to restructure the automaker is a huge gamble for the Obama administration.
But in a sign of progress in the government’s high-stakes effort, a bankruptcy judge approved the sale of substantially all of U.S. automaker Chrysler’s assets to a group led by Italy’s Fiat SpA in an opinion filed late on Sunday.
Following the bankruptcy filing, GM shares were removed from the Dow Jones industrial average and delisted by the New York Stock Exchange as “no longer suitable for listing.”
Chrysler’s bankruptcy, also financed by the U.S. Treasury, has been widely seen as a test run for the much bigger and more complex reorganization of GM.
President Barack Obama hailed the decision, saying it “paves the way for the new Chrysler to successfully emerge from bankruptcy as a new, stronger, more competitive company for the future.”
The administration’s ambitious plan for GM is for a quick sale process that would allow a much smaller company to emerge from court protection in as little as 60 to 90 days.
In bankruptcy, GM will divide in two: a leaner “New GM” and “Old GM” — which will include the parts of GM that will eventually be liquidated. GM said the split would be accomplished through what is called a Section 363 sale.
The new GM assets would transfer to an entity owned by the U.S. and Canadian governments, the UAW and GM’s unsecured creditors.
GM said in court documents that the 363 sale has to be quick as the U.S. Treasury has made clear it will finance New GM only if the sale transaction is approved by July 10.
“Now the hard part begins, which is making GM and Chrysler competitive. If they don’t do that, then we’ll be doing this all over again in a few years,” said Christopher Richter, an auto analyst at CLSA Asia-Pacific Markets in Tokyo.
“The immediate implication is that the companies are going to get smaller and so market share is up for grabs, which means that rivals like Toyota, Honda, Nissan and Hyundai are going to gain share.”
Since the start of the year, GM has been kept alive by U.S. government funding as a White House-appointed task force vetted plans for a sweeping reorganization that will be undertaken with $50 billion in federal financing.
By taking a 60 percent stake in a reorganized GM, the Obama administration is gambling that the automaker can compete with the likes of Toyota after its debt is cut by half and its labor costs are slashed under a new contract with the United Auto Workers union.
The federal government of Canada as well as the province of Ontario agreed to provide another $9.5 billion to GM in a late addition to the plans for the bankruptcy.
GM plans to close 11 U.S. facilities and idle another three plants. It has not provided an updated target for job cuts but had been looking to cut 21,000 factory jobs from the 54,000 UAW workers it now employs in the United States.
The UAW would have a 17.5 percent stake in the “New GM.” The Canadian government would own 12 percent and GM bondholders would receive 10 percent. In its filing, GM also provided an updated list of its major trade creditors including Starcom Mediavest Group and Delphi Corp.
Officials involved in the planning for GM said the White House was a “reluctant investor” in GM, but had to prevent a liquidation that analysts say would have cost tens of thousands of jobs at a time when the economy is mired in recession.
GM alone employs 92,000 in the United States and is indirectly responsible for 500,000 retirees.
“We want a quick, clean exit (from bankruptcy) as soon as conditions permit,” U.S. Treasury Secretary Timothy Geithner told students at Peking University in Beijing. “We’re very optimistic these firms will emerge without further government assistance.”
Obama is due to speak on the auto industry shortly before noon EDT (1600 GMT) on Monday. A news conference by GM Chief Executive Fritz Henderson is set to follow.
U.S. officials said there was no plan to provide any further funding for GM and insisted that all of the Detroit Three could survive. Ford Motor Co has not sought emergency federal aid.
In the case of GM, the goal of restructuring is to allow it to return to profitability if U.S. industrywide auto sales recover even slightly to near 10 million units annually.
Until now, to stop losing money, GM had counted on a recovery to the 16 million mark the industry last saw in 2007, officials said.
CAREFULLY ORCHESTRATED FAILURE
GM’s bankruptcy, which was approved by the automaker’s board after a weekend of deliberations, is the most carefully orchestrated Chapter 11 filing in the history of American business.
The automaker’s final descent started with an emergency aid announcement by President George W. Bush’s administration on Dec. 19. It accelerated in late March when the new Obama government gave the company 60 days to restructure.
While the “New GM” is expected to emerge quickly from court protection, its shuttered plants, stranded equipment and other spurned assets would be left to liquidation in bankruptcy.
Al Koch, a managing director at advisory firm AlixPartners LLP, will be appointed chief restructuring officer in charge of liquidating those GM assets.
A veteran restructuring adviser, Koch has had prominent roles in Kmart Corp’s restructuring and other turnarounds.
Over the weekend, GM won support for the government’s plan from investors representing 54 percent of the company’s $27 billion in bondholder debt.
Bondholders could take up to 25 percent of GM if it recovers to be worth what it was in 2004.
Founded in 1908, GM rose to dominate the U.S. and global auto industries under the stewardship of pioneering Chief Executive Alfred Sloan, who famously pledged that the automaker would deliver “a car for every purse and purpose.”
By the mid-1950s, at the peak of its success, GM had some 514,000 employees. It accounted for about half of U.S. car production and its sales were twice as large as the No. 2 corporation, Standard Oil.
Technology bellwether Cisco Systems will replace GM on the Dow. Insurer Travelers Co will replace Citigroup Inc. Dow Jones said the changes will be effective as of June 8. GM’s stock fell to a low of 48 cents on Monday, a level last seen during the Great Depression.
The bankruptcy case is In re: General Motors Corp, U.S. Bankruptcy Court, Southern District of New York, No. 09-50026.
(Additional reporting by David Bailey, Soyoung Kim, David Lawder, John Crawley, Leah Schnurr, Poornima Gupta, Walden Siew and Tom Hals).
Credit for the Post goes to Yahoo and the above mentioned reporters