November 27, 2008

Thankful for... Bankruptcy

Justin Katz

On last night's Matt Allen show, Don explained why bankruptcy isn't such a frightening thing — and far preferable to business restructuring as performed by congressional Democrats. Stream by clicking here, or download it.

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I elaborated on some of these points in an earlier post:

...As a long-time restructuring professional who has been hired as an interim CEO or consultant to take numerous companies through bankruptcy and other out-of-court restructurings, the only viable solution for companies in GM's condition is bankruptcy.

There is a myth that every bankruptcy equals a liquidation outcome. Simply not true. Think of a typical bankruptcy as a court-ordered timeout where the company is provided with protection and time to restructure its operations so they can become cash flow positive, profitable and therefore offer more reliable employment to the remaining employees.

Many companies do such restructurings on their own and out-of-court when market trends require changes in strategy or operations. Adapting to changing market dynamics is simply part of good management. And sometimes circumstances beyond management's control change so swiftly that a formal restructuring process like bankruptcy is necessary.

By contrast, the Big 3 have had opportunities for years to complete their respective out-of-court restructurings. Their key stakeholders - including both management and the UAW leadership - have all failed to get the job done.

Any government bailout would reward past bad behaviors by leaving the stakeholders - with their ongoing track record of failure - in positions of power. Why would anyone trust people who have blown through billions of dollars of cash and destroyed shareholder value with more billions of other people's money? They deserve to be kicked out, not bailed out.

A government bailout would also implicitly suggest that political power in DC can trump economic reality at the companies. Only politicians and incompetent executives would believe the dangerous illusion that economic reality can be wished away by legislation and funny money. A bailout is nothing but corporate welfare for powerful corporations.

A bailout would only serve to perpetuate the negative cash flow status quo, which would require further bailouts. Why? Because a bailout undermines incentives for real change, for key stakeholders to make the necessary hard decisions...and we have years of empirical proof that the necessary tough decisions never get made in Detroit.

The business model for the Big 3 is an outright failure. It must be blown up and rebuilt to be cash flow positive and profitable. It can be done; all you have to do is look at the numerous other auto makers in the USA to find auto companies who have cash flow positive operations.

Restructuring the Big 3 is not a job for Congress, any politicians, taxpayer's monies, or current management. It is a job for turnaround professionals, distressed investors, and a new set of industry professionals, people who know what has to happen now, who are not bound to legacy issues, and who bring a sense of urgency to the problems at hand. Only then will a genuine rebirth be possible...

Posted by: Donald B. Hawthorne at November 27, 2008 7:59 AM
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