The Company when It's Old (2): Alcoa, GM & IBM

There's a lesson here that may save you some grief in the future.  No matter how powerful it may be today, a company won't stay on top forever.  Being called a "blue-chip" or a "world-class operation" can't save a company whose time is past, any more than Great Britain was saved by having the word "Great" in its name.

Long after Great Britain had lost its empire, the British people continued to think of their country as stronger and mightier than it really was, the same as the shareholders of US Steel.

International Harvester, the dominant force in farm equipment for an entire half-century, peaked in 1966 and never came back, even though it tried to change its luck by changing its name to Navistar.  Johns-Manville, once number one in insulation and building supplies, topped out in 1971. 

The Aluminium Company of America, better known as Alcoa, a Wall Street darling of the 1950s when the country was discovering aluminium foil, aluminium siding, and aluminium boats, rose to $23 a share in 1957 (adjusted for splits), a price it didn't see again until the 1980s.

General Motors, the dominant car company in the world and the bluest of the automotive blue chips, reached a peak in October 1965 that it wouldn't see again for nearly 30 years.  Today, GM is still the largest company in the US, and first in total sales, but it's far from the most profitable.  Sometime in the 1960s, its reflexes began to slow.

The Germans came ashore with their Volkswagens and their BMWs, and the Japanese invaded with their Toyotas and Hondas.  The attack was aimed directly at Detroit and GM was slow to react.  A younger, more aggressive GM might have risen to this challenge more quickly, but the older GM was set in its ways.

It continued to make big cars when it could see that small foreign cars were selling like crazy.  Before it could build new models that could compete with the overseas models, it ad to overhalul its outmoded factories.  This cost billions of dollars, and by the time the overhaul was complete, and small cars were rolling off the GM assembly lines, the public had switched back to bigger cars.

For three decades the largest industrial company in the US has not been largely profitable.  Yet if you had predicted this result in 1965, when GM was riding the crest of its fame and fortune, nobody would have believed you.  People would sooner have believed that Elvis was lip-synching.

Then there's IBM, which had reached middle age in the late 1960s, about the time GM was in decline.  Since the early 1950s, IBM was a spectacular performer and a great stock to own.  It was a top brand name and a symbol of quality - the IBM logo was getting to be as famous as the Coke bottle.  The company won awards for how well it was managed, and other companies studied IBM to learn how they should run their operations.  As late as the 1980s, it was celebrated in a best selling book, In Search of Excellence.

The stock was recommended by stockbrokers everywhere as the bluest of the blue chips.  To mutual fund managers, IBM was a "must" investment.  You had to be a maverick not to own IBM.

But the same thing happened to IBM that happened to GM.  Investors were so impressed with its past performance that they did not notice what was going on in the present.  People stopped buying the big mainframe computers that wer the core of IBM;s business.  The mainframe market wasn't growing anymore.  IBM's personal computer line was attacked from all sides by competitors who made a less-expensive product.  IBM's earnings sank, and as you probably can guess by now, so did the stock price.

By now you might be wondering what's the point of investing in a stodgy old company such as IBM, GM, or US Steel? 

Swine flu is a non-recurring event

Move Over Swine, The Bulls & Bears Are Back
Posted By:Bob Pisani

Topics:Swine Flu Wall Street Investment Strategy Stock Market

Companies:General Motors Corp

Stocks show only modest weakness, despite concerns over swine flu. Airlines, hotels, cruise ships and some food processors are down, but the overall market is only fractionally to the downside.

Why? Because after an initial panic Sunday traders have concluded that swine flu is a non-recurring event, which is unlikely to have a long-term impact on the economy.

This view, however, could change if the situation deterioriates dramatically.

Meanwhile, we are closing out the month in a few days, and stocks are up for the second month in a row:

S&P 500: up 7.9 percent
NASDAQ: up 10.3 percent

While most of the gains for the month came in the first half, both the S&P and the NASDAQ are on the verge of breaking out to multi-month highs.

This wasn't in the bears playbook; we were supposed to sell off in the middle of earnings season.

Remember this simple mantra: after the gains since the bottom on March 9th, sideways or up is a victory for the bulls.

Here's who would own what of GM's common shares under the latest GM proposal:

Government 50 percent
Unions 39 percent
Bondholders 10 percent
Current shareholders 1 percent

Two issues are on everyone's mind:

1) Will the bondholders accept an all-equity bond exchange?

The unions are on board, but 90 percent of the bondholders have to approve the deal by the May 26th deadline.

Many traders think it would be better to hold out for bankruptcy.

Why? Because bondholders feel they are getting the short end of the stick. Bondholders are being asked to exchange $27 billion in debt for 10 percent of the company; the unions are getting $10 billion in cash (half of the $20 billion they are owed) AND a 39 percent stake in the company.

Most analysts feel the same way. Brian Johnson at Barclays said "the offer is unlikely to be accepted by bondholders, who are in effect being asked to sacrifice most of their claims in order to help GM satisfy commitments to the UAW."

John Murphy at Bank of America/Merrill Lynch, who said back in November that bankruptcy was the most likely outcome for GM, repeated that assertion this morning.

2) Is the latest GM restructuring more realistic than the prior plans?

On the surface, it certainly appears to be: the last plan in February assumed they would be breakeven at 15 million in seasonally adjusted annual car sales; this one assumes 10 million would be breakeven.

Hardly discussed is whether the new core strategy of concentrating on Chevy, Cadillac, Buick and GMC will work; most analysts believe they should concentrate on at most 3 brands.

http://www.cnbc.com/id/30437791


http://www.youtube.com/watch?v=MdIfefLcdoU

Obama tells carmakers to shape up or face bankruptcy

March 31, 2009

Investors get the jitters as Obama tells carmakers to shape up or face bankruptcy



Christine Seib in New York


President Obama's warning yesterday that he would not hesitate to put General Motors (GM) and Chrysler into bankruptcy slashed the price of the American carmakers' debt and pushed insurance against its default higher.

GM bonds maturing in 2033 and paying 8.375 per cent dropped 2.75 cents to 16 cents in the dollar.

Phoenix Partners Group said that buyers of a five-year credit default swap on GM debt would pay 80 per cent of the sum insured up front, plus 500 basis points a year, up from 77 per cent on Friday.

Term loans to Chrysler's automotive business were trading lower. Even Ford, which has not asked the US Government for a bailout, saw its debt drop slightly.

The President has given GM 60 days and Chrysler only 30 days to slash debt and hit other targets or face the bankruptcy courts. Even after talks lasting months, GM and, to a lesser extent, Chrysler had previously failed to convince their lenders to accept a smaller repayment than they are due. However, despite Mr Obama's threats, experts do not expect bondholders to roll over. Some may prefer to take their chances in the bankruptcy courts rather than accept the existing offer from the car companies.

Doug Harvey, partner in the automotive division at AT Kearney, the consultancy, said: “Bondholders traditionally are gamblers and aren't afraid to call a bluff.”

Under the terms announced by the White House yesterday, GM has 60 days to negotiate with its bondholders to cut its $28 billion unsecured debt by two thirds. The company has a relatively small amount of secured debt. The carmaker wants its unsecured bondholders to accept as much as 90 per cent of the equity in the reorganised company, plus some cash and new unsecured notes. The bondholders want the Government to guarantee this new debt.

It is not clear how much of the value of bondholders' investments is wiped out under the terms suggested by GM, but Standard & Poor's, the ratings agency, describes the offer as a “distressed exchange”, indicating that the value of the debt was now substantially below par.

After the Government's announcement, a bond analyst said: “Bondholders as a group will now need to decide whether they accept a distressed exchange outside the bankruptcy court or pursue remedies in court.”

If GM was to be put into Chapter 11, bondholders could argue that they should be allowed control of the company, be repaid via the sale of some assets or even the sale of the whole company.

This may result in a payout not substantially less than is currently on offer, but takes the control from the bondholders and puts it into the hands of a judge - a risky strategy.

Mr Obama has made clear that any bankruptcy proceedings will be closely overseen by the Government. This does not bode well for bondholders, who have already been described by Steve Rattner, the President's adviser on the car industry, as less constructive than he would like.

Analysts at Credit Suisse said that the Government may use the bankruptcy proceedings to put itself above unsecured lenders in any future payout, in order to protect taxpayers' funding that it supplies to GM.

Fritz Henderson, GM's new chief executive, indicated that President Obama's support for GM made it more likely the company would file for bankruptcy. "Whether out of court or in court, either way, they'll be there to support us," he said.

A statement from a committee of GM's bondholders said that they would prefer that the carmaker did not go into Chapter 11.

"Bondholders did not cause GM’s problems ... but are more than willing to work towards a comprehensive, sustainable solution in which GM emerges a leaner, more competitive entity," the statement said.

http://business.timesonline.co.uk/tol/business/industry_sectors/engineering/article6005600.ece