tHe OFFICIAL pUbLICAtION OF

September 2010

GMs Four-Point
Turn

Navigating

AlixPartners Albert Koch, who helped oversee the automakers revival, identifies the takeaways from the turnaround

Cover Story

GMs Turn Four-Point

W
When General Motors Camaro was unveiled in the 1960s, the cars first commercials depicted a white automobile, complete with rally racing stripes, ascending from a volcano. Set amid smoke, rocks and small explosions, with a music track seemingly borrowed from the TV show The Land of the Giants, the SS350 was Chevys answer to the Ford Mustang. More than 40 years later, the commercial albeit not the message is still fitting, as GM finally climbs from the ashes of a monumental turnaround

Navigating

Photographs by Fabrizio Costantini

AlixPartners Albert Koch, who helped oversee the automakers revival, identifies the takeaways from the turnaround By Ken MacFadyen

Cover Story
that had been put off for decades. The resuscitation of General Motors is unlike any turnaround or restructuring ever witnessed. From the scale of the problem to the Senate hearings and subsequent government funding, it can be hard for any executive to relate. SSG Capital Advisors J. Scott Victor, founding partner and managing director at the firm, says in his view, There is no correlation, whatsoever between GMs restructuring and what most distressed middlemarket companies may encounter. But as GMs performance starts to reflect the labors of the turnaround, others believe important lessons can be pulled from the effort. AlixPartners Albert A. Koch, vice chairman and managing director at the firm who helped oversee the turnaround, notes that even the distinctiveness of the GM situation underscores a key theme in this kind of rehabilitation work. Theyre all unique, he says. Big or small, any turnaround is about figuring out what the issues are, and then solving them quickly. Its like fixing an airplane in mid-flight. Koch, 67, should know. Before he signed on to work with GM, he accumulated a track record that included turnaround mandates for Kmart, where he served as interim chief financial officer; Polar Corp., where he served as chief executive for three years ending in 2007; and Champion Enterprises, again as interim CEO as the company went through an out-of-court restructuring in 2002 and 2003. Currently, Koch serves as the president and CEO of Motors Liquidation Co., tasked with disassembling GMs old business, including shuttered factories and brands such as Pontiac and Hummer. A retelling of GMs story probably isnt necessary. It was nearly impossible for anyone with access to a television or radio to not follow the companys descent into bankruptcy. From there, a new GM emerged, owned primarily by the US Treasury, with the United Auto Workers union, the Canadian government and GM bondholders together assuming the 40% balance. As GM returns to health, its story is still hard to avoid. From the 25% jump in sales for GMs four strongest brands (Chevy, Buick, GMC and Cadillac), announced in August, to the sticker price of GMs newest hybrid line, the Volt, taxpayers are kept wellinformed as to the status of their investment. Even the back-and-forth talk of a possible IPO seems to be in real time the UAW said paperwork would be filed with the automakers upcoming earnings statement, while CEO Ed Whitacre in August mitigated expectations, telling the Wall Street Journal succinctly Were not there yet. The part of the story that doesnt necessarily reach the masses is the way in which GMs turnaround is like every other distressed situation. Koch, for instance, cites four indicators of corporate decline that are present in nearly every distressed situation. He points to weakening revenue or profit margin; poor industry dynamics; either too much debt or inadequate capital; and insufficient information systems. GM, of course, operated in an industry facing intense global competition, which wasnt saddled

Its like fixing an airplane in mid-flight.

with the labor and healthcare costs that weigh down the Detroit automakers. Rising raw material costs also cut into GMs profits, while rising gasoline prices made certain lines of its automobiles irrelevant almost overnight. The result was a roughly 30% decline in domestic car sales. Incentives to lure in consumers chipped away at the companys margin, and by the time GM declared bankruptcy, its cash burn was roughly $1 billion a month. In the companys last quarterly filing with the SEC ahead of its bankruptcy, GM disclosed that it had over $54 billion in total debt. The progression to true distress, Koch says, typically starts with strategic issues, and within nine to 18 months, without intervention, those issues can evolve into profitability concerns. At that point, questions about liquidity can pop up in under nine months if nothing is done to solve the mounting issues. As distress progresses, it tends to spiral, and for operators, the degree of freedom only shrinks. This is why when a turnaround pro like Al Koch discusses the keys to their business, it almost always comes down to speed. Three of Kochs four key indicators of decline are fairly obvious. The one that might get overlooked is also the most important when it comes to effectuating a turnaround. If a companys information system is

inadequate, its ability to process and act on specific factors is compromised. GM, for its part, relied on customized, complex legacy systems. It didnt make the turnaround any easier as executives had to identify which components of the company would stay with the new GM and which would be shuttled to the liquidating company. Koch, though, points to his experience at Kmart as a better reflection of the difference a reliable information system can make. If you had a question about inventory or whether merchants were taking markdowns to move it, it was extremely difficult to get that information, he says. The fix wasnt easy, but the resolution introduced a level of accountability. Decision making improved, and management had a basis to build off of as it reworked Kmarts strategy. Koch saw a similar situation at Oxford Healthplan, a mandate he worked in the late 1990s. Following a systems breakdown, executives couldnt readily distinguish between the profitable and money-losing contracts. You had to dig through, and do it manually. What we discovered was that it was abundantly clear which accounts werent worth keeping. Reliable information also allows executives to act with speed and certainty. A factor in many instances of distress, Koch says, is that managers tend to be in denial. They may rationalize that a company or unit is just going through a difficult quarter, he says. While hope is what drives growth, in a deteriorating situation it becomes the void that creates the spiral. Hence, executives miss opportunities re-align their business. To play catch-up after a certain point managers will have decisions made for them. With the passage of time, your options burn off, Koch notes, contrasting that tendency with those of successful companies that are always looking for weaknesses. The GM bankruptcy provides a case study in overcoming distractions. Consider the period between mid February and mid April, last year. The company devised four options as part of its bankruptcy prep program, devising cram-down, pre-pack, NewCo and out of court

strategies. Executives were able to procure a bridge loan from the Canadian government, while negotiating the final loan package. This was roughly around the same time that GM started exploring the feasibility of a 363 sale. Amid all of this, Rick Wagoner was forced to step down by the US governments Auto Task Force, clearing the way for Fritz Henderson to assume the role. On the same day GM submitted its third plan of viability to the government, the Auto Task Force responded by criticizing the scale of the plan, and set the clock at 60 days for the company to come up with something new. Throughout all of this, GM was working with the UAW to finalize a new contract; negotiating to sell brands such as Hummer and Saab; working with Delphi to assure the liquidity of the parts maker, but still had to take steps to procure new sourcing arrangements should Delphi be forced to liquidate. This two-month stretch drives home the unique nature of the GM bankruptcy. Yet Koch cites that every turnaround has its distractions its unavoidable. As cash dries up and covenant violations approach, attention is suddenly directed to lender presentations, finding sources of liquidity or calls to comfort the supply chain. Its paramount that executives navigate around the distractions and stay focused on the business. If there is a benefit to a crisis, its that it forces companies to confront issues. In todays environment, in which flat is the new up, businesses can either be content to muddle along or management can take the initiative and be proactive about forcing change. Koch notes that hes seeing a lot more companies address their turnaround plans before it hits crisis stage. There are a few caveats to starting early, however. Beyond not having the advantage of bankruptcy to clean the slate, it can also be harder to get employees to buy into a turnaround. If theres no crisis, people are much less inclined to get excited, Koch says. Still, the transition from mere strategic issues to liquidity concerns has never been shorter. If GM teaches the market anything, its to fight the tendency to put off a fix.

Theyre all unique.

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