Tuesday, June 2, 2009

Why GM's Financial Projections Are Invalid

GM Financial Projections

When General Motors submitted its proposed Restructuring Plan to the federal government in late February, one could hypothesize that, absent some sort of miraculous revelation being contained within the proposal, the resultant outcome would be a bankruptcy petition. In our opinion, the Restructuring Plan did in fact provoke a miraculous revelation on the Government's part: Even when the future viability of the Company depends on it, General Motors is unable to produce a valid set of financial projections showing that it could ever turn things around.

General Motor's restructuring plan is a full 117 pages long. The majority of the document is comprised of claims that the company will fulfill the following goals: manufacture more fuel efficient cars, reduce labor costs, kick unsecured bond-holders to the curb, and solicit additional aid from foreign governments. These are great ideas, however, we took 30 seconds or so and came up with the following problems:
  1. GM doesn't know how to profitably design/manufacture/market/sell fuel efficient cars.
  2. The UAW will not want to give management concessions.
  3. A large portion of GM's bond holders are individual retail investors-they will pen op-ed's in the WSJ and inspire an outpouring of empathy.
  4. Foreign governments are not happy with the US right now. There will be no free foreign lunch for the GM boys.
Having confirmed that the prose section of GM's proposed plan is basically worthless, let's assess the quantitative portion of the document. To begin with, we were a bit insulted to see cash flow projections as far as five years into the future. To illustrate our reasoning, please select any five year window of time during this decade, and consider the significant changes to the world and the economy that occurred during that time. 

Our primary grievance with GM's financial projections has to do with the methodology used to calculate the Enterprise Value of the Company, and the inherent deficiencies in the GM brand that render those calculations invalid. Specifically, we refer to the fact that in a calculation of Enterprise Value, a Peer Group is a necessity that allows the analyst to apply a set of standardized EBITDA multiples to the Company in question. The following companies were used as GM's Peer Group:
  • Daimler AG
  • Toyota
  • Honda
  • Nissan
  • Hyundai
  • Renault
The problem, as we see it, is that these companies do not belong in any "Peer Group" of which General Motors is also a member. None of the companies listed above have a horrible reputation for producing shoddy vehicles. In fact, surveys have shown that the more educated an individual is, the more likely he is to avoid the purchase of an American car. We don't understand why Evercore selected these companies for inclusion into GM's peer group, however, it may be because every member of GM's real Peer Group is either in Chapter 11, or teetering on the precipice of such.

Ultimately, the most painful insult that can be given to a Company is the determination by the Federal Government that you are bloated and unprofitable, and need to shed some of your outsized liabilities. Sounds similar to a cliche we heard once concerning a pot and a kettle.

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