General Motors (GM) is currently trying to get rid of everything it doesn't need. Is recently sold its preferred equity stake in Ally Financial -- the former GMAC -- and yesterday announced that it's shedding similar preferred holdings in Delphi, the parts supplier it spun off in 1999 but then helped keep on life support for the next decade.
In the annals of bad business moves, the Delphi move in the late 1990s deserves a good case study. GM essentially bowed to Wall Street's desire to see it de-integrate its parts-making functions (and the labor costs and obligations that came with them). But Delphi never thrived as an independent entity. In fact, GM continued to fund it right through its 2005 bankruptcy and even bought back chunks of the company when GM exited its own bankruptcy proceedings in 2009.
Toward a leaner, meaner balance sheet
Even as GM retakes lost U.S. market share from Toyota (TM), re-establishing itself as the number one American automaker, it's trying to behave financially like a business under relentless pressure. Which, in a sense, it is. CEO Dan Akerson's primary job isn't coming up with great new car designs -- it's maintaining GM's post-IPO market capitalization.
To that end, GM is doing whatever it can right now to increase profitability. Selling its preferred equity in Ally netted $300 million, while selling back its preferred slice of Delphi yielded $1.6 billion. GM insists that this is all to streamline the company's balance sheet -- which is true -- but it's also aimed at supporting a $50 billion post-IPO market cap.
Delphi can now do its Delphi thing
Delphi is getting buffeted by all these moves, and you could certainly make the argument -- as The Truth About Cars' Edward Niedermeyer does -- that the government gyrations involved with keeping GM and Delphi alive had the "beneficial" effect of getting rid of costly pension obligations (just as GM spinning off Delphi in the first place freed it from billions in pension-funding obligations). Of course, the alternative was liquidation, so choose your ugly scenario.
You can also do the rough math on a probable Delphi IPO. The company did about $14 billion in business in 2010, with pre-adjusted earnings of almost $1.5 billion. Back in 1999, Delphi priced its IPO at $1.7 billion. This time around it could price it at $7 billion. Overall, the company is now much smaller, far less reliant on GM, and plans to enter high-growth developing markets more aggressively. It the grand scheme of things, it's a good potential financial play in an auto market that is recovering from the depths of its 2009 despair.
Consider the counterfactual: American Revolution 2.0
Over the past 100 or so years, the auto industry has created an immense amount of wealth. In the past decade and half, it's destroyed a lot. However, it is leading the manufacturing sector our of the deepest recession since the 1930s. The technology industry isn't yet doing this. And the housing sector remains moribund and may not make a contribution until 2015.
Both the GM and Delphi bankruptcies and rebirth through returns to the public markets indicate that, with national political support, a critical industry can remake itself. Consider a different creative destruction scenario, in which GM and Delphi are dead, as is Chrysler, and Ford (F) is the only U.S. carmaker left -- but it's many billions in debt. Unemployment is at 20 percent. A 9.0 earthquake and tsunami cause major damage to the supply chains of the foreign carmakers who are supposed to be taking up the slack left in the wake of the liquidation of two-thirds of U.S. carmaking capacity.
No cars. No car loans. No recovery. No jobs. But Wall Street is still booking record profits. Sounds to me less like a formula for Great Depression 2.0 and more like a spur to American Revolution 2.0.