For months the news was horrific, a pounding beat of warm-up obituaries for what once had been America’s greatest and most influential corporation: General Motors. At death’s door or already in the graveyard were Bear Stearns, Lehman Brothers, Merrill Lynch, AIG and Citibank. The mood was apocalyptic.
With car sales in a free fall from the worst economic downturn since the Great Depression, GM was losing billions and running out of cash. By the time the com- pany closed its books on 2008 it would be in the red by a staggering $30.9 billion. Chief executive Rick Wagoner led the auto delegation in Washington seeking government funding to save the industry and keep GM out of bankruptcy.
Five years later, after an unprecedented government equity investment, GM is thriving and the Treasury plans to sell its remaining stake in the coming months. With countless articles and books now written about the GM restructuring and turnaround—not to mention three years of trumpeting by the Obama Administration taking full credit for the turnaround’s success—the most startling aspect of the prevailing narrative is that the core of how the restructuring really happened, inside GM, is yet to be fully told.
In the popular version of the company’s turnaround story, as GM teetered toward liquidation in 2009, an Obama-appointed SWAT team, led by financier Steven Rattner, swept in and hatched a radical plan: Through a novel use of the bankruptcy code they would save the company by segregating and spinning out its valuable assets, while Washington furnished billions in taxpayer funds to make sure the company was viable.
The real GM turnaround story, significant in saving the auto industry and the economy, is contrary to the one that has been published. In fact, the plan that was developed, implemented and then funded by the government was devised inside GM well before President Obama took office. In what follows, the inside story of this historic chapter in American business unfolds, laying bare the key facts.
GM’s extraordinary turnaround began long before Wagoner went to Washington in search of a massive loan to keep GM alive. My involvement in that story began in GM’s darkest days, five years ago on Sunday, November 23, 2008, when I visited Wagoner at his home that morning, presenting a novel plan to save General Motors.
As a consultant with expertise in restructurings and turnarounds, I had completed a half-dozen assignments at GM over the years. I had worked with Wagoner in 1992 when he became chief financial officer. I was asked to come in for a two-year stint as CEO of GM’s National Car Rental, the first time GM had recruited an outsider to lead a turnaround in one of its subsidiaries.
By 2008 I had over 20 years of experience with the auto industry and almost 30 years of working on turn- arounds. But for the past eight years I had backed away from business and my firm, AlixPartners, to care for my daughters after the death of my wife. I was essentially ‘retired’. But GM’s enveloping crisis and my friendship with Wagoner would bring me out.
Early on that November Sunday, I called Wagoner at his home in a Detroit suburb. I asked to see him right away, explaining that I had a new idea that could help save the company.
Three hours later I walked through his front door and into his family room. I knew Wagoner believed GM could not survive a bankruptcy. Studies showed consumer confidence would crash. No one would buy a car from a company that was bankrupt. However, what I knew about the economic crisis and GM’s rapidly deteriorating liquidity position told me the company had no choice but to prepare for a bankruptcy.
Yet I agreed with Wagoner. For a global company as big and complex as GM, a ‘normal’ bankruptcy would tie up the company’s affairs for years, driving away customers, resulting in a tumultuous liquidation. It had happened to other companies a fraction of GM’s size. It would mean the end of GM.
“I don’t think the company will survive a bankruptcy,” he told me. “And no one has shown me a plan that would allow it to survive a bankruptcy.”
“Filing bankruptcy may be inevitable, Rick. But it doesn’t have to be a company-killing bankruptcy,” I said. “I think we can create a unique strategy that allows GM to survive bankruptcy.”
To be sure, my idea, sketched out on a few pages, was provocative. I knew as I pitched it to Wagoner that it might raise eyebrows, if not outright objection, from others who believed their plans would be safer.
In short, I proposed that GM split into two very separate parts before filing: ‘NewCo’, a new company with a clean balance sheet, taking on GM’s best brands and operations; and ‘OldCo’, the leftover GM with most of the liabilities. All of the operational restructuring to make the new company profitable would also occur before a bankruptcy filing so GM could go through bankruptcy in a matter of days—not months or years with creditors and other litigants fighting over the corporate carcass while the revenue line crashes.
Seeking funding from the government, or any source, we would use Bankruptcy Code Section 363, which allows a company to sell assets under a court-approved sale. Typically, 363 is used to sell specific assets, from a chair and desk to a factory or division, but not the entire standalone company. Under this strategy GM could postpone filing a plan of reorganisation and a disclosure statement, which consume months and fuel a blizzard of litigation while market share and enterprise value bleed away.
Wagoner listened, challenging every assumption. After discussing it with board members, Rick asked me to come to GM and work on the plan, one of several alternatives GM would consider. I volunteered to help GM on a pro bono basis. But what I could never anticipate was how deep and strong the opposition to my plan would ultimately be.
On Tuesday, December 2, I pulled into GM’s Detroit headquarters at 7 am after most of the company’s executives had already arrived for work. I was given a small cubicle and conference room on the 38th floor, a spacious but empty place that held GM’s corporate boardroom and a warren of cubicles reserved for visiting executives and board members.
Each day I would be the sole person who got off the elevator on 38, one floor down from where Wagoner and his team worked. It was eerie and quiet, the main wall lined with large oil paintings of GM’s past chairmen. I’d walk past those gilded frames daily, feeling the full weight of their gaze, reminded of the history and past glory of what had been the most powerful corporation on earth.
Spending 18 hours a day digging through the numbers in GM’s filings, I began working in greater detail on the outlines of the plan and making some assumptions on what assets should be transferred to NewCo and what would stay in OldCo, which I dubbed Motors Liquidation. There were thousands of crucial questions that had to be asked and answered with management: Which brands and factories would survive? Which ones would the company have to give up? What would be the endgame strategy? What would be the enterprise value of NewCo? The liquidation value of OldCo?
Wagoner and COO Fritz Henderson were developing three alternative plans. First, they hoped to avoid bankruptcy altogether, believing the government would provide enough funding to bring GM through the crisis. At least two cabinet members in the Bush Administration and others had provided assurances to Rick and board members that government help would be forthcoming.
Second was a ‘prepackaged’ bankruptcy plan being developed by general counsel Robert Osborne with Harvey R Miller, the dean of the bankruptcy bar and senior partner at Weil, Gotshal & Manges. Under this plan, GM would prepare a reorganisation in cooperation with its bond creditors that would take effect once the company went into a Chapter 11 bankruptcy. The goal of a so-called prepack is to shorten and simplify the bankruptcy process.
Miller commanded great respect in bankruptcy circles and in the GM boardroom, and for good reason. At the age of 75, Miller was the only attorney in the country who had successfully dealt with as many high-profile bankruptcies. Miller was already in the middle of the largest corporate liquidation ever, at Lehman Brothers.
And third was the NewCo plan, based on years of experience at AlixPartners, where we had a major role in 50 of the 180 largest bankruptcies over $1 billion in the past 15 years. GM had also retained Martin Bienenstock, the restructuring and corporate governance leader from Dewey & LeBoeuf, to help develop the NewCo plan as well.
Inside and outside GM, the pressures mounted. Each day the company lost more money and got closer to running out of cash. In Washington several prominent politicians began calling for Wagoner’s resignation. On December 7, Senator Chris Dodd, the Connecticut Democrat, told Face the Nation’s Bob Schiefer that Wagoner had to move on.
The next day I went to see Wagoner to offer encouragement and advice. It is not unusual for a CEO to lose his job when his company is forced into bankruptcy and a major restructuring. I’d seen this play out many times before and learnt the boss should never volunteer his resignation without first putting in place the things that would help the organisation survive. I wanted to help fortify Rick’s resolve and keep us all focussed on the endgame.
From my perspective Wagoner had been unfairly treated by many politicians and the media. Since taking over as CEO in 2000, working closely with Fritz and vice chairman Bob Lutz, Rick orchestrated large, dramatic changes at the company. They closed GM’s quality, producti-vity and fuel-economy gaps with the world’s best automakers, winning numerous car and truck awards. They built a highly profitable business in China, the world’s biggest potential car market. They reduced the company’s workforce by 143,000 employees, to 243,000. They reached a historic agreement with the UAW that cut in half hourly pay for new employees and significantly scaled back the traditional retiree benefit packages that had been crippling the company, while also funding over $100 billion in unfunded retiree obligations. And he was able to accomplish all these changes without causing massive disruptions among GM’s dealers or major strikes with the unions.
Ultimately, those structural changes positioned the company not only to survive but also to bring about the extraordinary turnaround. But now, with the economy and the company in free fall, all of that hard work seemed to be forgotten.
It was late in the day on December 8, around 5:30 pm, when I walked into Wagoner’s office.
“Rick, do not resign or even offer to resign,” I told him. “Later you may have to fall on your sword to get the funding deal done with the government, but don’t do it until we get the three things we need. If you’re going to be killed on the battlefeld, we need to make it worth it.”
“And what is that exactly?” he pressed me.
“We have to get government funding of $40 billion to $50 billion. Plus, we need an agreement with the government and GM’s board to do the NewCo plan. And we must put a qualified successor in place. It must be Fritz and not some government guy. It’s going to be painful for you, but you’ve got to stay on the horse until we get all three.”
Wagoner was already there. He had no intention of resigning and was determined to complete his mission. I gave him a bear hug, letting him know he had my full support.
When we gathered for a telephonic board meeting on December 15, the mood was urgent, the tension high. Only two weeks after arriving at GM I was about to present the plan to the board of directors in a conference room outside Wagoner’s office. Also on the phone were the company’s lawyers and investment bankers.
A Spiderphone was in the middle of the table for what would be a historic meeting of the board.
Only three days earlier the Senate had abandoned negotiations to provide funding for the auto industry. Suddenly a free-fall bankruptcy within days loomed large. Consideration of the NewCo plan, now refined with the help of chief financial officer Ray Young and other senior finance staffers, took on greater urgency as we were just two weeks away from running out of cash.
“I know the company has many lawyers and bankers working on other approaches,” I said. “I know many of the people doing the work, and I’ve worked with many of them over the years. But I have an alternative strategy for the board’s consideration. I suspect there might be some controversy over it, but I believe this could be lifesaving for General Motors.”
After carefully laying out the details and time sequence of the NewCo plan, I drew to a close.
“Well,” one director asked over the phone system, “I want to hear what Harvey Miller has to say about this. Is there a precedent for this, Mr Miller?”
Miller’s deep baritone voice filled the room, pointing out that the idea was unorthodox and lacked precedence.
Other attorneys chimed in, claiming the plan oversimplifed the situation and there would be major problems with it. Yet another added that this would not be viewed well by the court and doubted any judge would allow it. Collectively, they characterised it as a long shot, discouraging the directors from thinking the plan could ever succeed.
Hearing all the disapproving words amplified from speakers in the ceiling, I felt ambushed by general counsel Osborne, who was strongly advocating for a prepack- aged bankruptcy strategy, which he believed was the only way to go. Unbeknownst to me he had previously proposed the idea to GM’s board, naively believing GM could complete a prepack bankruptcy in 30 days.
GM’s most senior leaders had been working with me on the NewCo plan around the clock. I felt strongly this alternative approach could succeed, and I knew that any other type of Chapter 11 strategy would kill vehicle sales and lead to the demise of GM. Now it seemed as if the NewCo plan could be dead on arrival.
“If the attorneys feel this is a waste of time and corporate resources, I don’t know why we would pursue this,” stated another director.
A chilling silence descended upon the room, broken by Kent Kresa, the former CEO of Northrop Grumman and a GM board member since 2003.
“I understand this has some risk attached to it, but we’re in a very risky state right now,” he said. “And I understand it may even be unusual and unprecedented. But it’s certainly creative, and quite frankly, it’s the most innovative idea we’ve heard so far that has real potential in it. I think it deserves further consideration and development.”
Rick then addressed another lawyer on the call, Martin Bienenstock.
“Well, I’ve actually studied the problem, too, and there’s a way for this to work,” said Bienenstock. “Almost all bankruptcies are unique and the Code does allow for the transfer of assets. I can’t imagine a judge taking on this problem and not wanting to solve it. We’ve done a preliminary analysis, and it’s not as crazy as it sounds. It’s unique and compelling.”
“Okay, we’ve heard both sides of it,” Rick said after others spoke, smartly bringing the debate to a reasonable close. “I suggest we continue working to develop both the prepack plan and the NewCo option, while seeking the funding to avoid Chapter 11 if at all possible.”
The meeting adjourned without a vote. I left the room disappointed to hear Osborne’s legal chorus so dead set against NewCo and surprised their remarks had stopped all real discussion of the plan. But I also was relieved the plan was not completely dead, at least not yet.
Over the next weeks I worked closely with Bienenstock, assistant general counsel Mike Millikin, Al Koch of AlixPartners and GM senior vice president John Smith on the NewCo plan. We huddled dozens of times with Wagoner and Henderson to work out which brands GM would ultimately have to give up (Hummer, Saturn, Saab and Pontiac) and which ones it would keep (Chevrolet, Cadillac, GMC and Buick). Informed debate and deep analysis of structural costs led to decisions about projects, factories, brands and countries.
On Sunday afternoon, March 29, Wagoner called me. It was a call I had hoped would never come—but here it was.
“Jay,” he said, “I wanted to give you a heads-up. The Administration wants me to step aside. The President is going to hold a press conference tomorrow morning.”
Wagoner told me Henderson would be named CEO. “What about the bankruptcy?” I asked.
“They’re enamoured with the 363 NewCo plan. They seem bound and determined to make us file Chapter 11 and do NewCo… This is really tough,” he said.
“I’m so sorry,” I said, pausing, “but… you got the money. They’re doing the NewCo plan, and Fritz is your successor… You’ve succeeded. You got the three things.”
Rick responded with resigned acknowledgment, then said, “Please help Fritz in any way you can,” before hanging up.
Rick’s personal sacrifice was not in vain. Months of hard work had paid off. The assets and liabilities had been selected.
The NewCo legal entities and $45 billion tax-loss strategy had been developed. The strategy I pitched to Wagoner in his living room four and a half months earlier was the plan chosen by Team Auto in a meeting on April 3, 2009 in Washington.Treasury agreed to fully fund NewCo with equity, and thus it became the chosen path to save the company.
By late April, NewCo implementation was well under way. The bankruptcy filing would occur in New York within weeks. My partner, Al Koch of AlixPartners, would become the chief restructuring officer running OldCo, now officially named Motors Liquidation, Inc. In my notes, I jotted: “My work is finished... impact from this day forward will be negligible… Treasury’s in con- trol. Time to get back to my girls.”
On June 1, 2009, General Motors filed for bankruptcy in New York, with $82 billion in assets and $173 billion in liabilities.
It was the largest industrial bankruptcy in history. Harvey Miller and his team masterfully defended and guided the NewCo plan through the bankruptcy court, successfully making it their own. New GM exited bankruptcy protection on July 10, 2009—in a mere 40 days, as designed. Fritz called and thanked me.
There would be many other twists and turns to GM’s narrative, but the company got its fresh start using the NewCo plan, and the industry was saved with government funding from both Presidents Bush and Obama. In March 2009, President Obama cited a “failure of leadership” as his reason for forcing out Wagoner.
In fact, it was Wagoner’s exercise of leadership through years of wrenching change and then simultaneously seeking government funding while developing three restructuring plans that put GM in position to survive the worst economic collapse since the Great Depression and complete its turnaround, which, ironically, became a key campaign issue in the re-election of Barack Obama in 2012.
(This story appears in the 29 November, 2013 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)