GM Could Be Split Up In Bankruptcy Court

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The White House is considering splitting GM into two companies in bankruptcy court, one with strong brands — such as Chevrolet and Cadillac — and designed to survive. The other would be saddled with weaker brands — like Saturn and Hummer — to be sold off later in pieces.

On Thursday, that idea received an endorsement from GM's new chairman, Kent Kresa. Kresa told Automotive News that if GM has to go into bankruptcy, splitting up the company would be "a great idea."

'Good' GM Vs. 'Bad' GM

The Obama administration says a quick breakup of GM is still just an option, and legal scholars say a swift ride through Chapter 11 is easier said than done.

Earlier this week, President Obama said he is looking to avoid a long, legal slog in court. Instead, he said, he wants to use parts of the bankruptcy law that "can make it easier for General Motors and Chrysler to quickly clear away old debts that are weighing them down so they can get back on their feet and onto a path to success."

Specifically, the administration says it is looking at Section 363 of the bankruptcy code, which would allow a company like GM to be split into good and bad parts.

The thinking goes like this: A leaner, stronger GM with better brands would, ideally, leave court in 30 days. A second company with weaker brands would stay there, and parts could be sold off to pay creditors. Of course, that could take time, given the wretched state of the economy.

"It's a very bold and very risky move, but it could be the right thing to do," says Lynn Lopucki, who teaches law at UCLA and Harvard.

Lopucki says spinning off a healthy version of GM would give the company a better chance at survival.

"It is bold, in the sense that it would in one fell swoop free GM from its debts," he says.

Navigating Bankruptcy

Bankruptcy proceedings aren't known for speed, however. GM says it thinks the longer it is stuck in court, the fewer people will want to buy its cars. So, the company has to make as many deals with as many creditors as fast as it can.

Jay Westbrook, who teaches bankruptcy law at the University of Texas at Austin, says that won't be easy.

"My problem is, I don't think those constituencies — or at least most of those constituencies — are well-enough organized, are sufficiently cohesive," he says. "So, I think it's going to be very hard without the strong arm of the law — as we say — to get everybody to agree."

GM owes money to various partners, including its union and its suppliers. It also owes its bondholders $27 billion. GM is offering to pay the bondholders only 33 cents on the dollar. The bondholders, including mutual funds, don't like that idea — or at least some of them don't. No one person actually speaks for all the bondholders, making it harder to cut a deal.

Westbrook says amid all the uncertainty, an individual bondholder may be leery of making a move.

"Who wants to be the one who says, 'OK, I'm ready to agree to concessions,' and then find out that the guy next door is not agreeing to the concessions you thought he was going to agree to?" he says. "That, I think, is a very real problem."

Cost Of Keeping GM Afloat

Edward Altman is one of the nation's top bankruptcy experts; he teaches finance at New York University's Stern School of Business. Altman says he is confident GM will be saved. He says he likes the idea of creating a new, streamlined GM in court, but keeping the company afloat afterward will cost a fortune in taxpayer loans.

"The company's going to need, in my opinion, something like $40 [billion] to $50 billion," he says. "They are going to need that money for the liquidity of riding it out during this very severe recession.

"Just because they get concessions doesn't mean people are going to start buying cars."

GM hasn't yet said if it will file for bankruptcy protection, but Fritz Henderson, the company's new CEO, said it was more probable it would. He vowed — one way or the other — to get the concessions the company needs to make it.

"We will get the job done," he said. "We will either do it out of court or we will do it in court, but we will get the job done in terms of re-creating and reinventing General Motors as a competitive enterprise."

To get there, however, the company will probably have to navigate the perils of bankruptcy court and survive a recession-battered auto market — the worst in more than a quarter century.

Even then, a new GM will be much smaller and look dramatically different from the company the world has known.



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