Turn Arounds, GM and the 800 pound Gorilla

About twenty five years ago I started my entrepreneurial career by doing turn arounds. I did six in three years. It was a learning experience which was considerably difference than doing a start up. You came in at a totally different stage. By the time you entered as the turn around CEO all of the remaining management and Board members knew that there was a real problem and that time was of the essence. Thus you did not have any illusion that if you only tried strategy X a bit longer it would work.

The turn around strategy consists of the following steps:

1. Fire half the people. It really makes no difference what half. Once I had a sub of a major US company and to meet the appropriate legal guidelines I fired everyone whose Social Security number ended in an even number. That way I was not being fired. It really makes no difference who you let go. Trust me. You get to keep both good and bad people and the agony of doing anything else is not worth it.

2. Restructure your liabilities real fast! One must remember that Chapter 7 Bankruptcy can be file by 3 or more creditors against you. Thus you must be willing and ready to do it to yourself. It is going to war and you may have a good chance of getting killed. The creditors will bark and scream and you must let the know in no uncertain terms what you intend to do. I did a company in Texas once where we had $200,000 in cash, and owed $2.5 million to creditors. I asked them to a Friday meeting, in the Texas heat. They arrived in their gun toting pick up trucks and sat in front of me. I had been there at most two weeks at that point. I bought a case of bourbon and told them they had two options. Agree to a restructuring of equity for debt or I had my lawyer on the courthouse steps prepared for a Chapter 7! If they agreed I would break open the bourbon. I hate bourbon. I walked out into the blazing Texas sun and waited the ten minutes I had given them. When I came in one big rough Texan, I think he provided components, stood up and spoke for the group. He said: "For a g...m Yankee you have b...s, open the bourbon!" I solved the liquidity problem.

3. Speak to the customers, try raising prices. On one of my deals I had a major customer in Houston. I had to go there on an awful hot July day and meet with them. They were in the trash business. I met them for lunch with my COO, I had just fired the sales head at the airport, and after three martinis, I get him to stay and we then went to Gilley's that night! I really hate Martinis and Gilley's later burned down.

4. Find a buyer real quick! Having restructure the company, cleaned up the balance sheet and kept the customers, at least for a while, the final step is to get a buyer. As the turn around person everyone at this point hates your guts, so you must find a new management team, and the best way to do that is a new owner.

Now to GM. The following is the Balance Sheet for GM as of the end of last year and pro forma for June 30, 2009. I have made some assumptions and calculations.

























A simple analysis of the GM issue appears to me to be a case where all four rules have been violated. Also when I look at a restructured balance sheet I cannot in any way ever see how, given the union commitments, that they can ever survive! Just look at this balance sheet. You cannot have the $60 billion in commitments and survive. The numbers do not add up. The US Government may pump more money in but that does not solve the problem, it is just taking the money from the taxpayer, now and for generations to come, and paying off the union. The 800 pound gorilla will not solve the problem. It will just make the imputed labor costs per vehicle grow exponentially, and if one wants lower costs "greener" autos then the percent of the sales price for this overhead will make any such vehicle unprofitable.

Well, it will all be played out in a few days! This is what happens when politics trumps economics, I mean real economics not the academic kind!