Preparing for the 'most complex ... industrial bankruptcy in history'
5 YEARS LATER

Inside GM's path to survival

Preparing for the 'most complex ... industrial bankruptcy in history'

GM's Rick Wagoner and Jay Alix during a two-day series of meetings in Alix's office at the end of 2008. The B1, B2, and B3 scrawled on the whiteboard between them reflect bankruptcy scenarios: NewCo, accelerated prepackaged and free-fall.

Photo credit: JAY ALIX
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Five years ago this week, General Motors Corp. -- long a symbol of America's industrial might -- sought bankruptcy protection.

The June 1, 2009, filing marked the climax of frenzied months of activity for the U.S. auto task force. The 14-member team led by Steven Rattner had been created by newly elected President Barack Obama to decide the fates of Chrysler and GM as the industry reeled from the worst economic crisis since the Great Depression.

Team Auto ultimately sold Obama on a plan, permitted under Section 363 of the U.S. Bankruptcy Code, to auction off the company's "bad" assets. The "good" would be preserved as a new entity, or NewCo, the General Motors Co. that emerged within six weeks of the bankruptcy filing.

But work on such an idea had begun within GM before outgoing President George W. Bush kept the automaker alive with a first round of U.S. rescue loans, contends Jay Alix, founder of AlixPartners, a corporate turnaround specialist with long ties to GM.

Alix says he outlined his vision to CEO Rick Wagoner at Wagoner's suburban Detroit home in November 2008. Wagoner, while publicly opposing bankruptcy, allowed that and other contingency plans to take root before he was ousted by Obama and his task force on March 30, 2009.

Alix detailed his version of events in a Forbes magazine article last November.

In these written responses to questions from Automotive News, Alix explains how those months of preparation within GM were critical in paving the way for the eventual speedy exit from bankruptcy.

Chart the course of the NewCo/363 idea at GM.

I first brought the idea to Rick Wagoner in November 2008. He and certain GM board members vetted and supported the idea and I went to work inside General Motors to develop the overall strategy. I ran it by attorney Martin Bienenstock, an authority in bankruptcy law, who also considered it a good idea. Martin was then hired into GM to help with all the legal development. I presented it to the entire GM board in December 2008 and continued to develop it for four months after that with GM management, staff and attorneys.

Team Auto was formed in February 2009 and Martin socialized the idea with its lawyers in March of 2009. GM and Martin shared e-mails and documents with them regarding the idea and plans. Early in April 2009 a meeting was held at the U.S. Treasury offices in Washington. The agenda prepared by Team Auto stated that: A. GM will likely go into bankruptcy, per the preference of Team Auto; and B. Team Auto was going to choose GM's NewCo option for fixing the company, not the prepack bankruptcy alternative that was GM's other option on the table at the time.

Members of the U.S. auto task force team have said the 363 idea was theirs, with no input from General Motors. In the end, GM was saved. Why did it matter that a group within the company began working on a similar approach in late 2008?

It did matter and it does matter for two reasons. First, the work done in 2008 on spinning out the "good company" using the NewCo/363 idea is the reason that GM was able to exit bankruptcy so quickly and successfully. The concept is easy to state -- take the best parts of GM, combine them and spin them off into an up-and-running, stable and profitable new GM -- but very difficult to execute.

GM is a complex global company with thousands of legal entities crossing multiple legal jurisdictions, multiple taxing authorities, multiple brands, multiple joint ventures, multiple proprietary licensing agreements, multiple labor agreements, multiple locations and multiple classifications of creditors and claimants. The historic 40-day bankruptcy could never have happened without the months of prior planning and development that took place within GM before the Obama administration even took office.

Development of the plan began in November 2008 and detailed records show it was presented to the GM board on Dec. 15, 2008. It survived rigorous scrutiny and internal debate. It was one of three plans being developed and, as such, it had to withstand the intense competition and challenges that GM's rival strategies posed. This vigorous internal debate was critical to making the plan battle-ready and able to withstand the challenges to be faced in the bankruptcy court.

The second reason it matters is because it was all designed and preplanned as the largest, most complex and fastest industrial bankruptcy in history, and therefore it should be understood accurately. Historians, economists, business leaders, students and restructuring professionals will study the GM bankruptcy for generations. With five books published and countless news accounts, it is time for the historical record to be corrected and the full story to emerge.

The challenge was to prepare the company internally starting in the fall of 2008, so that, assuming the legal argument worked, GM could both file bankruptcy and also immediately file the motion for this 363 sale to happen within just a few weeks, and transfer the good assets on a worldwide basis, which had to be identified and readied for split off before the filing. That has never been done on a company of this size.

In order to make this strategy work, you have to completely restructure the company before it goes into Chapter 11, again something which is almost never done. You have to do most of the cost-cutting and business-fixing beforehand because if you don't, the company you spin out will lose money, fail and go back into bankruptcy, thus defeating the strategy.

The next part that had never been done before in this type of situation was the preservation of the full $45 billion tax-loss carry-forward of GM. Companies do preserve their tax attributes in reorganizations, often diminished, but tax law requires that the debtor company survives and files a plan of reorganization and that the plan is approved by the bankruptcy court. The enabling legislation we negotiated along with the 363 sale sidestepped the Internal Revenue Code requirement of filing and getting approval of a plan of reorganization to preserve the billions in tax-loss carry-forwards.

We were able to devise a way to put GM through bankruptcy fast, fix it fast beforehand and have it emerge fast as a stand-alone successful business. We designed it to have a clean balance sheet with plenty of liquidity, and all the previous years of aggressive restructuring enabled it to be profitable almost immediately. All of that is what makes up the core of GM's unique NewCo/363 plan that was presented to the GM board in December 2008 and completed through the bankruptcy on July 10, 2009.

In Alix's office on Dec. 31, 2008: Charting a way for GM to break even under a NewCo in a U.S. market of 9.5 million sales, well below the 16 million level that was typical before the industry collapse.

Photo credit: JAY ALIX

Wagoner had said repeatedly that he opposed bankruptcy of any sort. So why all this bankruptcy prep inside GM?

No good leader puts all his eggs in one basket. You plan for every contingency. Wagoner correctly believed that a conventional bankruptcy filing would do irreparable harm to the company. He was absolutely right on that score. That's why the work on the NewCo plan was so important. It kept the company out of a long, drawn-out bankruptcy that would have almost certainly destroyed GM because customers would not buy cars from a bankrupt company.

The NewCo plan, with all of its combined elements, was a novel approach based on many separate features. Individually, each has been used before, but the unique combination of all of them -- along with the sequence and timing in which they were used -- was all new. This is evidenced by the fact that the nation's top lawyers working for GM, who were all experts in the field, maintained that my plan was completely unorthodox and unprecedented, and there was no case law or clear support for it.

Section 363 of the bankruptcy code has been around for a long time. It has been used mostly for selling assets in a company, sometimes used to sell the whole stand-alone company. It almost never is used to create an immediately profitable going-concern on a global scale and have it go into and come out of bankruptcy in just days to then operate as an independent entity. There is a lot of case law that says that probably should not have worked.

You say the real turnaround story is different from published accounts. How?

There are many important differences to the "published story." Virtually the entire turnaround of the business operations, as well as the balance sheet restructuring plans, had all been largely designed and/or completed before the government team ever came into GM for a few weeks in the spring of 2009. All the significant changes to the global cost structure that led to GM's recent profits were put in place by GM management between 2003 and 2008.

Second, GM could have avoided bankruptcy and still fixed its problems. The government put up $50 billion and lost $11 billion on that investment. Had the government considered more fully and carefully Rick Wagoner's plan and ideas for saving General Motors, the government would not have invested as much money and not lost as much money.

Third, the contention that management had no plan to fix the company is completely false. Management not only had one plan; it had fully developed three alternative plans, each based on a different set of circumstances and assumptions. In addition, the company's viability plan, which was rejected by the government, was a very solid operating plan and, in fact, became the core and the basis for everything that was done later in the restructuring, on into the bankruptcy, and post-bankruptcy as well.

Fourth, a comparison between GM, which sought government assistance, to Ford, which did not seek such assistance, has been made many times. The fact is the companies' conditions really weren't that much different initially, and their outcomes could be attributed mostly to a difference of timing. Ford was in financial difficulty and in deeper trouble than General Motors in 2006. That's why Ford borrowed $24 billion, leveraged up its balance sheet and gave all its assets as collateral. That borrowing was very controversial at the time. But because they had the problem early, they borrowed the money when credit markets were still open, and that then gave Ford the liquidity it needed to get through the crisis.

General Motors' liquidity problem, which was caused by the financial crisis, came just a little later. In the previous 10 years the company had paid out more than $100 billion to fund legacy pension and health care obligations to protect retirees. So, in 2008, when GM needed cash, the credit markets were closed, and GM couldn't get that working capital back. So, while revisionists have been saying that Ford was smart and GM was dumb, that's not really it at all. The comparison of Ford to GM as good versus bad, or right versus wrong, is a shallow and uninformed analysis.

Fifth, the level of competence, experience and ability of executives in the auto companies -- as published in stories -- has been falsely portrayed. It's both ridiculous and improbable to suggest that these people, who graduated from some of the best engineering and business schools in the world, are incompetent.

Sixth, unlike the critics, I have spent 30 years in the hot kitchen of corporate turnarounds and restructurings. I have witnessed firsthand CEOs wilt under the pressure of bankruptcy and I have also seen some operate at peak performance. I, along with most knowledgeable people, marveled at Rick Wagoner's strength, character, integrity and steadfastness under the most severe internal and external pressures I have ever seen.

Finally, there is no shortage of individuals, as well as journalists and talking heads, who incorrectly see the bankruptcy as the turning point in GM's resurgence. That is not the real inside story.

In fact, the 2009 bankruptcy masked the true roots of GM's historic turnaround from a previous decadeslong decline. Wagoner and his management team had brought GM's decline to a halt and turning point in 2004, '05, '06 and '07. During that period, they'd reached historic agreements that reduced labor costs, gotten a two-tier wage system, capped the post-retirement health care costs using the [Voluntary Employees' Beneficiary Association], substantially funded other post-retirement benefits, gotten broad work-rule changes, put GM into the right markets around the world, and had gotten GM's productivity, quality, cost and vehicle design all to world standards. These actions, which all take hundreds of top managers to execute and years to complete, are all well documented.

It is simply ridiculous for anyone to suggest that a few people from Washington, with no auto industry or global restructuring experience, somehow did all this restructuring and turnaround work in just a few weeks in one of the world's largest and most complex industrial enterprises, having spent less than two hours with the CEO. The real turnaround story is that GM was restructured and turned around internally, based on plans sponsored and developed by its board, management team and their advisers. Thankfully, the financing was provided by the U.S. taxpayers through both Presidents Bush and Obama, with their due diligence and support coming first from the Treasury and later from Team Auto.

Describe the board's reaction in December 2008 to the NewCo plan.

We were dealing with many challenges faced by the board of directors on at least four levels, all of which are separate and distinct from their particular reaction to the NewCo plan. The first is that no board of directors wants its company to go into bankruptcy.

The second level of conflict is: If I as a board member accept the fact that the company may have to go into bankruptcy, then there are real differences of opinion being professionally articulated by competing interests -- major law firms, who say plan A is better than plan B, or plan C is better than A and B, or there's a nuance in A that's not in B, and so on. Most board members do not have the experience or a level of sophistication when it comes to bankruptcy, so when there are competing plans or conflicts in the approach, they end up by default relying on the various lawyers who give them their analysis, and that analysis in the case of General Motors was in dispute.

The third level of conflict is that you have a situation where there might be alternatives to filing bankruptcy, which most people would prefer.

The fourth level of conflict is the extra risk associated with being a board member in a troubled company in our litigious culture. Most rational directors are rightfully concerned about getting sued and are getting legal advice on how to avoid it, which can often conflict with the best business solution in a high-risk troubled situation.

The reality is that once I explained my ideas and strategy to Rick Wagoner in November of 2008, Rick immediately vetted it with members of the board of directors. I then did an interview with representatives of the GM board, led by Erskine Bowles. They then moved quickly and supported the idea.

In retrospect, how effectively do you think you presented the NewCo/363 plan to the board? Would you have done anything differently?

I don't think I could have done it any differently. I was part of the GM team at that point, and it was very important to work with the team. Teams have momentum, teams have power and teams have a certain imperative. I was deep inside General Motors working side by side with its leaders. I had a full and fair hearing by the board. I went into the meeting with the full support of the financial and operating management of the company. I did not know that I didn't have the support of the then-general counsel, so in some ways I guess I probably should have been more aware that he was against the plan.

Is GM better off that the economy collapsed when it did, as it finally brought GM's decadeslong decline to a turning point?

The economic collapse did much more damage than good. It delayed programs, weakened the company and its management, took away market share, impaired its global relationships and left it with the moniker "Government Motors." None of that left GM better off. There has been a lot of collateral damage.

Having said that, because of the crisis, General Motors was able to accomplish a number of other goals that it had been working on for years.

While a "normal bankruptcy" was not Rick's preferred choice because he thought it would ruin the company if it dragged out, it turns out we were able to plan for a fast and successful bankruptcy once Rick saw that there was a way to get through it quickly.

Whiteboard work on Dec. 30, 2008, shows plans for the dealer and brand footprint, upper left, and a focus on Saab, Canada and General Motors Europe (GME).

Did Delphi's dragged-out bankruptcy weigh on Wagoner and help frame his opposition to the idea of Chapter 11?

Rick had a ringside seat to the Delphi bankruptcy and how it was dragged out over four grueling years and how difficult it was for Delphi to get out of Chapter 11. But he also knew that he had completed most of GM's operational restructuring over the last 15 years. In that time he fixed a number of troubled divisions and subsidiaries and completed spinoffs while observing other companies struggle through bankruptcy and restructuring. He wanted to frame his solution for General Motors, taking all that into account. But the thing that was really driving him was that he knew that any company that sells high-value products to consumers, especially long-lasting products that have warranties, cannot afford to go into bankruptcy or be in a bankruptcy for very long if they want to keep their customers and market share.

You simply cannot afford to have an auto company operating for many months, or worse, years, in a Chapter 11 and expect to sell expensive vehicles to consumers. The auto bankruptcies stand alone in terms of their high reliance on consumer confidence, consumer emotional feelings about the company, the sense of security, the sense that there's a future resale value for your car, and that warranty service and the availability of replacement parts will all be there in the years to come. Rick knew that the auto companies could not afford to have a typical bankruptcy, a protracted bankruptcy, the "normal" Chapter 11 process.

You give Wagoner credit for a long list of restructuring moves -- such as product renaissance, UAW concessions, expansion in China -- before the crisis. Why didn't he trim more GM brands?

There was brand trimming going on by GM before the crisis hit. Shutting down Oldsmobile, a major brand, was done by Rick in the years leading up to the crisis. It provided a major learning experience and template for how difficult and costly it is to do. He also was dramatically shrinking Pontiac, and as early as December 2008 -- four months before the government insisted on a bankruptcy -- Rick and [COO] Fritz [Henderson] had decided on the shutdown of Saturn, Hummer and Saab.

But, it's not just the brand you shut down; you get into the area of individual dealers throughout the U.S. who are protected by state franchise laws. It's not easy or cheap to walk away from legal obligations.

When you make the decision to shut a brand down, people think, "I'll just move the customers from that brand to my other products." It turns out this is also very difficult. Once a brand is announced as discontinued, customers often change companies or manufacturers. Also, dealers of that closed brand don't just switch over and carry your other brand. They control the real estate and they don't go from being a Chevy dealer to a Cadillac dealer. They go from GM dealer to Toyota dealer, or Saturn dealer to Honda dealer, or Saab dealer to Nissan dealer, taking many of their customers with them.

So instead, what you try to do is carefully migrate your customers and brands toward the future platforms you want to be in. You start to merge distribution channels and combine dealers and showrooms. But, if you stand up and say, we're closing these three brands, you basically take all those customers and kiss them goodbye to your competition, and often, your foreign competition.

On the manufacturing side of it, when you close a brand, that means you close a factory, if not many factories. Those factories are all staffed by your UAW labor force, and your UAW contract doesn't allow you just to walk away from those workers and walk away from your health care obligations, unemployment benefits and the pension and post-retirement obligation to those workers.

Has GM's current recall crisis changed your opinion of the Wagoner era?

No. Wagoner restructured GM to enable it to survive and achieve its present strong position. As much as every auto company tries to build the safest vehicles possible, there's always a chance -- when you are making millions of highly sophisticated products, all with millions of moving parts, all being operated by millions of people, over millions of miles -- there's always the chance that something can go wrong.

You can reach Dave Versical at dversical@crain.com.


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