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Thursday, October 31, 2013

Jay Alix Now Takes Credit for GM Bailout

Editor’s Note: Lots of people–including President Obama–have trumpeted their role in the success of the government-backed turnaround plan that saved General Motors, the most important industrial company in the history of the United States. But on the fifth anniversary of the crisis, Forbes presents an exclusive, unprecedented look at what really happened during GM’s darkest days, how a tiny band of corporate outsiders and turnaround experts convened in Detroit and hatched a radical plan that ultimately set the foundation for the salvation of the company.

Author Jay Alix, one of the most respected experts on corporate bankruptcy in America, was the architect of that plan, and now, for the first time, he reveals How General Motors Was Really Saved.

Ruggles Writes: Alix IS highly respected, or at least he has been. The country of Japan once paid him huge dollars to analyze their own economic system. But I am reading this article with a grain of sale. It seems to me to be somewhat self serving for a Johnny Come Lately to come in 5 years after the fact to take a large measure of credit. I'll try to follow up this post with documentation either for or against.

Steve Rattner mentions Alix Partners only once, on page 197 of his book "Overhaul." Regarding resentment of Team Auto's bankruptcy specialist Harry Wilson, who rubbed many at GM the wrong way, Rattner writes in the book:

"To hear Harry and his even younger aides imply that the company was slow, inept, and out of date was insulting, to put it mildly. "Who does this little prick think he is?" they would sometimes mutter after a meeting with Harry. But not everyone connected with GM responded this way. Longtime advisers from such firms as Morgan Stanley, Alix Partners, and Evercore generally nodded in agreement with Team Auto's requests and "prescriptions," which often echoed their own past recomendations to their reluctant client."

I had been told by numerous sources that Wagoner threatened to fire any GM employee who even whispered the word bankruptcy. Here's Alix saying the Section 363 sales was his idea, presented to Wagoner on December 8, 2008, days before the Bush Administration extended the bridge loans that allowed GM to survive until the Obama Administration came in to inherit the mess. It IS clear, however, that there had been many steps taken by Wagoner and his executive team leading up to the bankruptcy that helped facilitate the unprecedented 40 day walk through Chapter 11 bankruptcy court. Regardless, after presiding over about $80 billion in losses, Wagoner left GM in March 2009 with a substantial "Golden Parachute." Sources differ on whether he was fired by the President, Larry Summers, or Steve Rattner, or just offered to step down and had his offer accepted. His record at GM was mixed at best.

Forbes: October 2013

By Jay Alix


In the popular version of the company’s turnaround story, as GM teetered toward liquidation in 2009, an Obama-appointed SWAT team, led by financier Steven Rattner, swept in and hatched a radical plan: Through a novel use of the bankruptcy code they would save the company by segregating and spinning out its valuable assets, while Washington furnished billions in taxpayer funds to make sure the company was viable.


GM’s extraordinary turnaround began long before Wagoner went to Washington in search of a massive loan to keep GM alive. My involvement in that story began in GM’s darkest days, five years ago on Sunday, Nov. 23, 2008, when I visited Wagoner at his home....

“Filing bankruptcy may be inevitable, Rick. But it doesn’t have to be a company-killing bankruptcy,” I said. “I think we can create a unique strategy that allows GM to survive bankruptcy.” .... I proposed that GM split into two very separate parts before filing: “NewCo,” a new company with a clean balance sheet, taking on GM’s best brands and operations; and “OldCo,” the leftover GM with most of the liabilities. ...we would use Bankruptcy Code Section 363, which allows a company to sell assets under a court-approved sale. Typically, 363 is used to sell specific assets, from a chair and desk to a factory or division, but not the entire stand-alone company. Under this strategy GM could postpone filing a plan of reorganization and a disclosure statement, which consume months and fuel a blizzard of litigation while market share and enterprise value bleed away.

... I volunteered to help GM on a pro bono basis. But what I could never anticipate was how deep and strong the opposition to my plan would ultimately be.

On Tuesday, Dec. 2, I pulled into GM’s Detroit headquarters at 7 a.m. after most of the company’s executives had already arrived for work. I was given a small cubicle and conference room on the 38th floor, a spacious but empty place that held GM’s corporate boardroom and a warren of cubicles reserved for visiting executives and board members.

Spending 18 hours a day digging through the numbers in GM’s filings, I began working in greater detail on the outlines of the plan and making some assumptions on what assets should be transferred to NewCo and what would stay in OldCo, which I dubbed Motors Liquidation. There were thousands of crucial questions that had to be asked and answered with management: Which brands and factories would survive? Which ones would the company have to give up? What would be the endgame strategy? What would be the enterprise value of NewCo? The liquidation value of OldCo?

...three alternative plans. First, they hoped to avoid bankruptcy altogether, believing the government would provide enough funding to bring GM through the crisis. At least two cabinet members in the Bush Administration and others had provided assurances to Rick and board members that government help would be forthcoming.

Second was a “prepackaged” bankruptcy plan being developed by general counsel Robert Osborne with Harvey R. Miller, the dean of the bankruptcy bar and senior partner at Weil, Gotshal & Manges. Under this plan, GM would prepare a reorganization in cooperation with its bond creditors that would take effect once the company went into a Chapter 11 bankruptcy. The goal of a so-called prepack is to shorten and simplify the bankruptcy process....

And third was the NewCo plan, based on years of experience at AlixPartners, where we had a major role in 50 of the 180 largest bankruptcies over $1 billion in the past 15 years. GM had also retained Martin Bienenstock, the restructuring and corporate governance leader from Dewey & LeBoeuf, to help develop the NewCo plan as well....

From my perspective Wagoner had been unfairly treated by many politicians and the media. Since taking over as CEO in 2000, working closely with Fritz and vice chairman Bob Lutz, Rick orchestrated large, dramatic changes at the company. They closed GM’s quality, productivity and fuel-economy gaps with the world’s best automakers, winning numerous car and truck awards. They built a highly profitable business in China, the world’s biggest potential car market. They reduced the company’s workforce by 143,000 employees, to 243,000. They reached a historic agreement with the UAW that cut in half hourly pay for new employees and significantly scaled back the traditional retiree benefit packages that had been crippling the company, while also funding over $100 billion in unfunded retiree obligations. And he was able to accomplish all these changes without causing massive disruptions among GM’s dealers or major strikes with the unions.

Ultimately, those structural changes positioned the company not only to survive but also to bring about the extraordinary turnaround. But now, with the economy and the company in free fall, all of that hard work seemed to be forgotten.


“Rick, do not resign ... until we get the three things...

“We have to get government funding of $40 billion to $50 billion. Plus, we need an agreement with the government and GM’s board to do the NewCo plan. And we must put a qualified successor in place. It must be Fritz and not some government guy. It’s going to be painful for you, but you’ve got to stay on the horse until we get all three.”

When we gathered for a telephonic board meeting on Dec. 15, the mood was urgent, the tension high. Only two weeks after arriving at GM I was about to present the plan to the board of directors in a conference room outside Wagoner’s office. Also on the phone were the company’s lawyers and investment bankers.

... we were just two weeks away from running out of cash.

Miller [and] ... Other attorneys chimed in, claiming the plan oversimplified the situation and there would be major problems with it. Yet another added that this would not be viewed well by the court and doubted any judge would allow it. Collectively, they characterized it as a long shot, discouraging the directors .... Unbeknownst to me [inside counsel] had previously proposed the idea to GM’s board, naively believing GM could complete a prepack bankruptcy in 30 days....

... Kent Kresa, the former CEO of Northrop Grumman and a GM board member since 2003 [spoke:]

“I understand this has some risk attached to it, but we’re in a very risky state right now,” he said. “And I understand it may even be unusual and unprecedented. But it’s certainly creative, and quite frankly, it’s the most innovative idea we’ve heard so far that has real potential in it. I think it deserves further consideration and development.”

Rick then addressed another lawyer on the call, Martin Bienenstock.

“Well, I’ve actually studied the problem, too, and there’s a way for this to work,” said Bienenstock. “Almost all bankruptcies are unique and the Code does allow for the transfer of assets. I can’t imagine a judge taking on this problem and not wanting to solve it. We’ve done a preliminary analysis, and it’s not as crazy as it sounds. It’s unique and compelling.”

“Okay, we’ve heard both sides of it,” Rick said after others spoke, smartly bringing the debate to a reasonable close. “I suggest we continue working to develop both the prepack plan and the NewCo option, while seeking the funding to avoid Chapter 11 if at all possible.”

The meeting adjourned without a vote....the next weeks I worked closely with Bienenstock, assistant general counsel Mike Millikin, Al Koch of AlixPartners and GM senior vice president John Smith on the NewCo plan. We huddled dozens of times with Wagoner and Henderson to work out which brands GM would ultimately have to give up (Hummer, Saturn, Saab and Pontiac) and which ones it would keep (Chevrolet, Cadillac, GMC and Buick). Informed debate and deep analysis of structural costs led to decisions about projects, factories, brands and countries.

On Sunday afternoon, Mar. 29, Wagoner called me. It was a call I had hoped would never come–but here it was. ...

Wagoner told me Henderson would be named CEO. “What about the bankruptcy?” I asked. “They’re enamored with the 363 NewCo plan. They seem bound and determined to make us file Chapter 11 and do NewCo. … This is really tough,” he said.

“I’m so sorry,” I said, pausing, “but … you got the money. They’re doing the NewCo plan, and Fritz is your successor. … You’ve succeeded. You got the three things.” ....

.... The strategy I pitched to Wagoner in his living room four and a half months earlier was the plan chosen by Team Auto in a meeting on Apr. 3, 2009 in Washington. Treasury agreed to fully fund NewCo with equity, and thus it became the chosen path to save the company.

[...and more on subsequent events]

Mike Smitka: As per Ruggles, this is fascinating, though as Ruggles points out none of the various insider accounts mention Alix as the source of the idea, though (I checked) contemporary news accounts do credit him and the others he mentions as outside advisors to GM. My suspicion is that the Task Force had staff who independently considered §363 – a quick news database search found lots of references in fall 2008 to §363 bankruptcies of this sort, including a panel at a bankruptcy lawyer conference labeling it a "hot topic". Similarly, on 20 February 2009 the WSJ blog [Deal Journal] posted of a Heidi N Moore interview with Mark Roe of Harvard Law School suggesting it as the obvious approach. In any case, both their performance in public and Rattner's account of interactions in private cast doubt on the ability of GM's finance operation to pull together details, and the sub-text I read in the Alix story is that until the very end GM's board remained fixated on unrealistic scenarios. Alix however focuses on Wagoner and does not point out that most of the board was replaced. But the latter deserves a post of its own, moribund boards of moribund companies. Chrysler under Iaccoca, GM under Roger Smith, Nissan for the 20 years prior to its acquisition by Renault...there are all too many examples.