The financial manager stands between the firm’s operations and the financial or capital markets, where investors hold the financial assets issued by the firm. The overall tasks of the financial manager are the investment/ capital budgeting decision and the financing decision. Thus, Financial managers are the key executives’ hat help achieve the primary goal of the corporation – maximizing the stock value by: • Forecasting and planning • Coordination and control • Transactions in the financial markets • Managing risk 2 Background – Financial decline of GM
It is no secret that GM, like all domestic automobile manufacturers, has increasingly struggled over the last several years due to increased competition from foreign manufacturers with lower wage, healthcare and benefit costs (in part, due to having far fewer retirees to support in the U. S. , and national healthcare structures in their home countries). GM has spent $103 billion over the last 15 years alone on these legacy costs, constraining investment in more advanced manufacturing and product technologies and significantly weakening the company’s balance sheet.
GM has made mistakes in the past — in now-untenable provisions from prior collective bargaining agreements, and insufficient investment in smaller, more fuel-efficient vehicles for the U. S. Even so, GM still supplies one in five vehicles sold in the U. S. today. In fact, 66 million GM cars and trucks are on this country’s roads today, 44 million more than Toyota. GM‘s financing arm, GMAC, cannot effectively access the secondary markets today. With each passing day, it is less able to finance the sale of GM vehicles, either for dealers or for the public.
One year ago, GMAC was able to provide either installment or lease financing for nearly half of GM retail sales. That number has fallen to 6% today. In addition, GMAC is no longer able to buy contracts for customers with a credit score under 700, which excludes roughly half the buying population. All of this has been especially toxic to GM sales in the past two months, with sales running about 40% behind year-ago levels. The company’s balance sheet, reflecting in substantial part the $103 billion in cash/assets used to fund U.
S. post-retirement healthcare and pension funds in the last 15 years, includes a ($60) billion negative net worth position at September 30, 2008. The Failure to Innovate Time and again over the last 30 years, G. M. has spent billions of dollars on innovative ideas like its Saturn small-car company in the 1980s and the EV1 electric vehicle in the 1990s, only to then deprive those projects of further financing because money was needed elsewhere or because they were not delivering enough profit.
The failure has been frustrating to those who remember the high value placed on innovation by legendary company leaders like Alfred P. Sloan Jr. and Charles E. Wilson, who felt G. M. could sell cars to the masses by demonstrating it was out in front. 3 In the early 1990s, the company lagged Chrysler’s Jeep and Ford by five years in bringing an S. U. V. to market with mass appeal. Once it had ramped up its offerings — it also owned Hummer — G. M. was reluctant to move from big profitable vehicles to building small, less profitable cars, even when gas prices spiked.
2007: A Slump Began As the price of gasoline at the pump topped $4 a gallon, G. M. was surprised by auto buyers’ dramatic shift toward the smaller, more fuel-efficient cars and away from the pickups and sport utility vehicles that had served as its mainstay. The company cut its fourth-quarter 2007 production by 10 percent, and by July 2008, overall United States sales had fallen 20 percent. G. M. announced plans to idle plants to address the shrinking demand for pickups and S. U. V. ’s. At the same time, it was adding shifts to try to make enough small cars.
Sales slowed by high gas prices ground to a near-halt as the Wall Street meltdown scared consumers and cut off many from credit. In mid-September 2008, Rick Wagoner, G. M. ’s former chief executive officer, asked the government for $7. 5 billion that would support $25 billion in loan guarantees that had been promised to help speed the switch to more efficient cars. The money was approved in October 2008, but not before a dire new forecast for global vehicle sales battered the shares of auto companies, particularly General Motors, whose stock plunged more than 31 percent.
4 How GM struggles to survive – Possibility for Bankruptcy On Feb. 26, 2009, General Motors announced that its cash reserves were down to $14 billion at the end of 2008. G. M. lost $30. 9 billion, or $53. 32 a share, in 2008 and spent $19. 2 billion of its cash reserves. It was clear that the company could not survive much longer without additional government loans. On March 3, 2009, G. M. announced that its sales were down 53 percent compared with the same month last year.
In the meantime, the auto task force chosen by President Obama had been delving into every aspect of the company’s downsizing plan, including its somewhat upbeat estimate of how the car market will look when the recession ends — a market it projects at over 15 million cars annually, as well as its designs for new products, its financial controls and its management. On March 29, 2009, the task force released its report, which concluded that G. M. made considerable progress in developing new energy-efficient cars and could survive if it cut costs sharply. The administration is giving G.
M. 60 days to present a cost-cutting plan and will provide taxpayer assistance to keep it afloat during that time. Most of the company’s board was replaced under the restructuring plan including G. M. ’s chief executive officer Rick Wagoner who was taken over by Frederick A. Henderson. GM’s plan includes government backing of warranties for cars and trucks made by G. M. and Chrysler to provide consumers enough confidence to buy them, even if the company declares bankruptcy. In addition bondholders resisted the changes to convert two-thirds of the $27 billion owed them into G. M.
stock, while the United Auto Workers union is being asked to substitute stock for 50 percent of their health care benefits for retirees. G. M. could be forced to file for bankruptcy protection in a number of situations, including failure to receive more federal aid, failure to exact concessions from bondholders and the United Automobile Workers union, and further deterioration of an already dismal new-vehicle market in the United States. 5 Additional cost cutting measures include 47,000 more job cuts worldwide this year and trimming down the huge labor expenses or the legacy costs.
GM’s retrenchment includes closing 5 more U. S. plants by 2012 and chopping salaries by as much as an additional 30 percent for the four-most senior officers. As the deadline nears, the core aspect of G. M. ’s new restructuring plan would involve accelerating the closure of at least a third of its 6,200 dealerships in the United States. G. M. ’s original plan called for closing 2,100 dealerships in the next five years. As per the latest details available, Mr. Henderson commented on April 18, 2009 that GM is developing a restructuring plan while simultaneously readying itself for a potential bankruptcy filing.
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