NBR's Darren Gersh Gives GM's Financial Plan A Test Drive
Wednesday, December 10, 2008PAUL KANGAS: If GM gets the money, what happens then? And just what is this company worth now, anyway? Good questions. So we decided it was time to get some better answers about what's behind the numbers GM sent to Congress. While Washington debates a bailout, we sent Darren Gersh to get some expert input from outside the beltway.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: To test drive GM's financial plan, I went to Dartmouth's Tuck School of Business and asked finance Professor Anant Sundaram to scrub the numbers the auto makers gave Congress. All right professor, so here is GM's term paper. Let's start with what grade would you give it.
ANANT SUNDARAM, FINANCE PROFESSOR, TUCK SCHOOL OF BUSINESS: If this was a term paper in my class, I would have to give it unfortunately, a "C" plus.
GERSH: Ouch.
SUNDARAM: The reason is there is lack of clarity. There is lack of consistency and the data, the methods, the approaches, are just not transparent.
GERSH: So this is kind of an all nighter?
SUNDARAM: Absolutely. Never happens at the Tuck School of Business though, but I have to say it has the feel of an all-nighter that was pulled with a drop dead deadline.
GERSH: In that all-nighter GM apparently left out a cash flow analysis, the gold standard of finance. So Sundaram did some detective work to estimate GM's revenues based on a chart on page 21. You can see all those details on our website, but here's the result.
SUNDARAM: Making certain very favorable assumptions, assumptions favorable to GM, if I were to back out a revenue forecast, essentially tells me that GM is expected to have about $136 billion in revenues in 2009, but they expect these revenues to increase to something in the $160 to $165 billion range by the end of year 2012.
GERSH: OK, so you've got the revenues up there. Now how aggressive is that assumption? How fast do they have revenues growing and have they done that before?
SUNDARAM: This revenue growth implicitly assumes something like 6 to 7 percent in compounded annual growth rate in revenues, which is a little bit on the optimistic side. Actually, if you look at how their revenues have grown in the last five years, it's been less than 1/2 percent per year, in fact closer to a 1/3 of a percent, so we are talking about growth rates being about 15 to 20 times what they have been in the recent past.
GERSH: Sundaram points out GM plans to do that while cutting brands, employees and dealers, but if we assume the company hits that goal, we can put a value on GM. Sundaram cautions it's a rough estimate which compares GM to companies like Toyota and Honda. Bottom line: GM could be worth $50 billion to $80 billion after it has successfully restructured the company in 2012. And using some fancy math that we will spare you, Sundaram adjusts that figure back to get a value for GM today.
SUNDARAM: And essentially under some reasonable judgments one can make about discount rates and so forth for GM, suffice it to say that in today's value, this $50 to $80 billion by the year 2012 will probably be - we're talking about it being somewhere in between $32 billion to $50 billion range.
GERSH: But wait, GM owes banks and investors and its union $66 billion.
SUNDARAM: So if $66 billion were the claims against this company, then what we are saying is the value that is left over for equity holders is negative.
GERSH: Which is why GM is promising Congress it plans to negotiate a deal to cut its debt almost in half. So if you were the bank of Congress, the first amalgamated bank of Uncle Sam and this company comes to you and says, we want $12 to 18 billion? Would you give it to them?
SUNDARAM: I would hesitate to say yes, unless I'm convinced that they can get all the reductions, perhaps a little more than they're hoping for. If I were the car czar that they are thinking of putting in place, the issue that I'd be focused on night and day, 24/7, is the speed at which I can get the liability down to $34 billion or below, i.e. the negotiations with the lenders and labor.
GERSH: Consider those debt restructuring negotiations GM's real final exam, one it must ace to stay in business. Darren Gersh, NIGHTLY BUSINESS REPORT, Hanover, New Hampshire.
