A GM (GM) Chapter 11?

Merrill Lynch has said what many people already believe. One of the large US car companies could go into bankruptcy. Merrill’s comments target GM (GM).

The brokerage’s analysis is that the biggest US car company will need to raise $15 billion to make it through current conditions. According to Reuters, Merrill Lynch analyst John Murphy cut GM to "underperform" from "buy".

The threat to GM is no longer on the expense side. When the company was in deep trouble three years ago, sales were fairly robust. In 2006, the US market had total vehicle sales of 17 million. GM was successful in making its target of taking $9 billion in annual operating costs out of the firm. If sales had stayed steady, GM would have been fine.

With annual American car sales trending toward 14 million or below for 2008, the industry’s problems have turned to rapidly falling revenue. If the average vehicle bought in the US costs the consumer $25,000, at least $75 billion in domestic sales could be taken out of the market in two years. With close to 25% of the total pie, GM would be devastated if the present sales level moves into 2009.

GM is likely to find a buyer, if things go that far. The candidates would be VW, which would like to have a slice of the US as large as Toyota’s (TM) or Renault/Nissan. Either operation could pull billion of dollars in redundant management, manufacturing, and product design costs out of the American firm.

Douglas A. McIntyre