D.F.

Krause

Read D.F.'s bio and previous columns

October 20, 2008

GM Tries to Survive by Trading for Junk and Cash; Hey, I Tried That Once!

Once when I was having a rough time financially, I traded in my car for another one because I happened to know the dealer was sometimes willing to sweeten the deal with cash back on the trade-in. It wasn’t a good long-term strategy at all, as I ended up with five years’ worth of payments on a car that already had 100,000 miles on it.

But all I cared about at the time was getting my hands on some cash so I could pay bills, and the trade-in/cash-back deal gave me the cash.

Of course, I got through that tough time, learned my financial lessons and became the highly respected CEO I am today – taken seriously by everyone as a great business mind. OK, so that last sentence got more absurd as it went on. The point is, I would never do anything like that today because trading a piece of junk for an even worse piece of junk, just to net out a little cash in the bargain, is stupid. It’s somewhat clever in a demented sort of way, but it’s something you would only do if you were desperate.

Like my pal, Rick Wagoner!

Rick is trying to do something just like what I did. The deal is similar in many ways. It involves cars. It brings you nothing of tangible long-term value. And just like when I did it, the motivation is nothing more than sheer desperation.

The latest move by GM to somehow survive a little longer is to try to acquire Chrysler – not with a cash offer, mind you, but through a trade. GM would give Chrysler’s current owners what’s left of its equity in GMAC. In turn, GM would get Chrysler.

Now, why would GM want Chrysler? It’s even closer to failing than GM is. But Chrysler does have something GM needs – cash. About $11 billion. GM is burning through $1 billion a month with no relief in sight. Banks won’t lend GM money without committing usury, because the company is collapsing and they’ll never be repaid. The federal government just approved $25 billion in loan guarantees for the Big Three, but they’re supposed to use it to fund development of cars that get better gas mileage, which would turn out to be pretty funny if they all end up going out of business first.

So what do you do when you’re desperate for cash and no one will lend it to you? Work a clever trade! That’s what I did! That’s what Rick wants to do too. The plan, or so we hear, is to acquire Chrysler without laying out any cash, bring Jeep into the GM fold and shut down the rest of the company. And most importantly, pocket that $11 billion.

Hey! At the rate GM is burning through cash, it will keep them alive an extra 11 months. In the meantime, maybe they can find a way to sell the Renaissance Center and any other assets they can convince someone to take.

You don’t suppose they might think about selling any cars, do you? Nah!

Rick and I have a lot in common. We are both CEOs. I am not the CEO of General Motors, of course, and I’ll let you decide if that makes me more or less impressive than Rick. But I do know what happens when you take on expenses and find that your sales can’t cover them. I did that. It wasn’t a good idea. I misread a short-term sales spike into what I thought would be a long-term growth trajectory, and then when it didn’t turn out to be that at all, I was in trouble. I learned how to move money around, push receivables forward, all kinds of clever little things to keep the payroll and rent checks from bouncing.

But try as I might, I couldn’t get sales to the point where we could support operations, let alone make a profit, from actual sales revenue on a consistent basis – until I was finally forced to make major changes. I should have fired myself for being such a bad CEO (I briefly did, actually . . . that’s a story for another day), but ultimately I learned that you have to operate on a positive cash-flow basis, and you can’t make long-term cost and overhead commitments without knowing for sure if sales will support them.

So when I make fun of Rick, which I do a lot, it’s not because I’ve never made the same mistakes he’s made. (And in fairness to him, he suffers from his predecessors’ mistakes as much as his own.) I have made those mistakes. I do think he says and does a lot of idiotic things, but I make no claim to be any less of an idiot.

At least I can say, however, that when I made my idiotic junk-for-more-junk-and-cash deal, it was on a much smaller scale, and I’ve never done anything like that again. If GM wants to keep jerry-rigging its continued existence with schemes like this, I wish it luck. Consistent positive cash flow, achieved by selling cars for more than you spend making them, apparently ceased to be a feasible strategy a long time ago.

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