The Detroit News was recently involved in a controversy surrounding a negative Chrysler 200 review by auto critic, Scott Burgess. Jalopnik.com reported that after receiving a complaint by an advertiser identified as a Chrysler dealership, the Detroit News softened the criticism on an online version of the review. Mr. Burgess displayed journalistic integrity by resigning over the incident. Since that time, the Detroit News has apologized and Burgess has returned to his position. This affair may just be a small scale indicator of a much wider flaw in the quality of journalists' coverage of the auto industry, particularly regarding General Motors.
As if General Motors did not have enough challenges to contend with, the UAW is now offering up some bellicose talk regarding upcoming labor contract negotiations. I discussed this issue last night with Neil Cavuto on Fox Business Network.
The media may want to take a break from its rooting for General Motors, not to mention its hype surrounding the Chevy Volt. USA Today recently summarized Consumer Reports' ranking of automakers based on performance and reliability. Of the 13 automakers receiving report cards, GM and Chrysler received the worst rankings.
The number one performer according to CR was Honda, followed by Subaru. Strong reliability contributed to the high overall scores. GM was number 12 on the list with only Chrysler receiving a lower score. It should not come as a surprise that the bottom two performers were the automakers that ended up bankrupt and receiving taxpayer funded bailouts.
The past few days have seen an approximate 7% rise in General Motors' Stock. Much of this gain is attributed to Wall Street investment banks initiating positive coverage on GM. A further review of the coverage reveals a wide divergence in opinion between big banks that are profiting from the GM IPO and analysts who did not.
Earlier this month, General Motors made a $4 billion cash contribution to its UAW pension fund. Reports state that an additional $2 billion worth of GM common stock will be contributed to the fund. What is not being reported is where the stock is coming from.
In addition to public ownership since the IPO, GM common shares are currently held by the US Treasury, Canadian Government, the UAW and Motors Liquidation Company (creditors of Old GM). Unless the US Treasury is giving away taxpayer shares, new shares will have to be issued for an additional $2 billion worth of common shares to fund UAW pension plans.
General Motors recently reported that it has a 93 to 95 day supply of vehicles at dealerships in its latest inventory report. This is well above the industry average of a 67 day supply, as well as exceeding analysts recommended 60 day supply. According to Jim Bunnell, general manager of GM's dealer networks, the reason is because they expect strong demand for vehicles. There is a more likely reason that should be a cause of concern for GM's new shareholders.
The General Motors' IPO has lead to the Obama Administration declaring victory for a successful GM restructuring. GM executives echo the optimistic view of a now healthy auto company with a "fortress like" balance sheet since the infusion of over $50 billion of taxpayer money. There is still one major test left to see just how healthy GM is.
General Motor's CEO, Dan Akerson, recently proclaimed that GM's balance sheet was "pristine" and that the company was aiming to have zero debt in the future. I guess the question is, "how do you define pristine?"
The recent prospectus for GM's Preferred Series "B" share offering gives the following accounting of some of the company's liabilities: as of September 30, 2010, $10.3 billion of outstanding debt and $9 billion Preferred Series "A" obligations. In addition, there are still under-funded UAW pension obligations of over $20 billion. The Preferred "B" share offering was for another approximate $4.5 billion of shares paying a 4.75% dividend. This is money that GM already has mostly committed to UAW obligations.
Most news we hear regarding General Motor's IPO this week proclaim the event as a huge success. It would be prudent to consider whether the process leading up to and following the auto industry restructuring should be a template for future restructurings, as Al Koch (head of Motors Liquidation or "Old GM") has stated. While some may argue the positive aspects of the GM bailout, it is more than just sour grapes or GM hating that contributes to a desire to have a continuing dialogue on the precedent setting procedures that may lead to a subversion of contract law that has governed for over 200 years in this country.
It would be easy to believe that the GM IPO is an opportunity to make easy money based on the reporting by television news networks. Themes such as allowing retail investors to "benefit" from the IPO imply that GM stock has no where to go but up. However, under the surface of this optimistic appearance lurk some hazards.
A little research on the web uncovers some of the red flags potential investors in GM should be aware of. Rather than speculate on why it is a "Tale of Two Cities" when it comes to GM reporting by TV networks compared to the internet, let's focus on one of the major warning signs that the outlook for GM may not be as rosy as expected.