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Can GM Make It?

General Motors is staggering and in desperate need of cash. What levers can the auto giant pull to save itself from bankruptcy?

At the close of business on Oct. 9, General Motors' (GM) market cap stood below what it was in 1929 and down more than 94% from its 2000 peak of $52.4 billion.

At its low in Thursday's trading, GM's market capitalization stood at $2.6 billion. The automaker's market cap was about $4 billion (about $48 billion in today's dollars) when the stock market crashed in 1929. GM closed at 4.76 on the New York Stock Exchange. Over the last 52 weeks, GM's high was 43.20.

GM was not alone. The Dow Jones industrial average closed down 679 points, to 8579.19. Ford Motor (F) closed at 2.08. Ford's 52-week-high is 9.25. (On Friday, GM climbed back a bit, rising 3% to finish at 4.89. Ford lost another 4% to close at $1.99.)

Balance Sheet Issues

The automakers' shares are being hammered because their balance sheets and cash burn were already a problem before the investment calamity that forced the U.S. government to approve a controversial $800 billion bailout. The crisis has since spread to European and Asian markets.

GM, its dealers, and would-be car buyers are all suffering from lack of access to credit. "Action to establish some normalcy to credit markets is important to our industry, period," said GM President Frederick Henderson.

Rating agency Standard & Poor's said Thursday it was reviewing GM and Ford for further downgrades based on grim forecasts by firms like J.D. Power & Associates that the industry will sell 2 million fewer vehicles to consumers in 2008 than last year (, 10/8/08), and that the cratering of demand for new vehicles will last through next year. The ratings being reviewed by S&P include the B- long-term corporate credit ratings for both Ford and GM, along with the B- long-term counterparty credit ratings for the two companies' respective financing arms, GMAC and Ford Motor Credit. The ratings already indicate the companies' debt is below investment grade. "While the global automotive industry is clearly experiencing a slowdown in 2008, the global market in 2009 may experience an outright collapse," said Jeff Schuster, J.D. Power's executive director of automotive forecasting. (Like BusinessWeek, S&P and J.D. Power are divisions of The McGraw-Hill Companies (MHP).)

Consumers Are Key

The wild card, say executives at J.D. Power, is how long consumers will stay out of the car-buying market. "Buying a new car is something that can be put off indefinitely," says J.D. Power Senior Vice-President Gary Dilts, who was previously the top sales executive at Chrysler. "When people start looking at their 401(k) statements, and looking to conserve cash, they could stay out another a year or more."

Besides overall sales declining, GM and Ford are especially feeling the pinch of demand for their pickup trucks and full-size sport-utility vehicles. Those models have historically provided the companies with all of their profit. The spike in demand for small cars, where the companies earn only about one-fifth as much profit, is not enough to compensate for the slowdown in the sales of bigger vehicles.

S&P said it believes both automakers have enough cash for at least the rest of 2008, but rapidly worsening industry conditions will make things tough for them in 2009. Fitch Ratings said this week that it believed Ford could be down to $8 billion to $10 billion in cash by the second half of 2009, which is the minimum a car company the size of Ford needs to fund day-to-day activities.

No Help from Financing Arm

GM lost a stunning $15.5 billion in the second quarter, and its cash stood at $24 billion. At that time, it was burning $1 billion a month of its reserves, but the rate of burn is thought to have increased in the recent Wall Street meltdown. The next 60 days will be critical, said GM's Henderson, who is watching to see if the credit markets loosen up after the U.S. government rescue package starts taking effect and European government actions kick in.

The automaker is beating the equivalent of corporate couch cushions for cash. It is, for example, trying to borrow between $250 million and $500 million from Detroit city pension funds using its corporate headquarters building as collateral. That amount of money is not enough to fund even one vehicle program.

Besides falling demand for cars and trucks, GM does not have the backstop of its GMAC finance arm, which for years earned huge money from auto and home loans. To raise money, GM sold a controlling stake in the finance subsidiary to Cerberus Capital Management, and the credit arm has been hit by the subprime loan problem that has rocked Wall Street and world markets.

Hummer Division on the Block

GM is running out of assets to sell to raise money, and the ones it has for sale now are having a hard time finding buyers. It is now trying to sell its Hummer division, as well as its commercial vehicle business. If it can't mortgage its building in downtown Detroit, it says it will try to sell it and lease the space back. Even at fire-sale prices, the availability of capital and credit is so tight for would-be buyers that they aren't finding attractive offers.

An indication of how fast GM is falling: It was only last May that the automaker bought the building for $626 million. Previously, it had leased the space it occupies on the Detroit waterfront.

To raise additional cash, GM has floated the idea of selling the public stock in its European operations, which could be spun off. But the success of that strategy is now in question given the spread of U.S. economic problems to Europe and Asia.

The Bush Administration approved a package of $25 billion in federal loans to automakers and suppliers to offset investments in building cleaner, greener vehicles. Federal officials recently said the money would not likely be available to the automakers until the end of 2009. But Michigan legislators said they would move to speed up the process to rescue their largest employers.

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