GM files for bankruptcy

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http://money.cnn.com/2009/06/01/news/companies/gm_bankruptcy/index.htm

GM files for bankruptcy
It's an end of an era for GM as the troubled automaker is forced into bankruptcy. GM is set to close nearly a dozen plants and cut more than 20,000 jobs.
By Chris Isidore, CNNMoney.com senior writer
Last Updated: June 1, 2009: 8:42 AM ET


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   NEW YORK (CNNMoney.com) -- General Motors filed for bankruptcy protection early Monday, a move once viewed as unthinkable but became inevitable after years of losses and market share declines that were capped by a dramatic plunge in sales in recent months.

In the end, even $19.4 billion in federal help wasn't enough to keep the nation's largest automaker out of bankruptcy. The government will pour another $30 billion into GM to fund operations during its reorganization.

Taxpayers will end up with a 60% stake in GM, with the union, its creditors and federal and provincial governments in Canada owning the remainder of the company.

Owners of GM cars should see little change as a result of the bankruptcy since warranties will still be honored. But there will be plenty of pain caused by the bankruptcy and the company's efforts to stem losses.

Nearly a dozen plants will be identified for closure by 2010, resulting in 20,000 job losses. Three more plants are set to be idled and put on stand by status in hopes for a rebound in sales that may never come.

GM will also shed its Pontiac, Saturn, Hummer and Saab brands and cut loose more than 2,000 of its 6,000 U.S. dealerships by next year. That could result in more than 100,000 additional job losses if those dealerships are forced to close.
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More than 650,000 retirees and their family members who depend on the company for health insurance will experience cutbacks in their coverage, although their pension benefits are unaffected for now.

Investors in $27 billion's worth of GM bonds, including mutual funds and thousands of individual investors, will end up with new stock in a reorganized GM worth a fraction of their original investment.

Owners of current GM (GM, Fortune 500) shares, which closed at just 75 cents a share on Friday, will have their investments essentially wiped out.

President Obama is due to address the nation later Monday to make the case why the bankruptcy and the additional federal help was necessary. CEO Fritz Henderson, who is expected to continue running the company, will speak in New York shortly after the president finishes his remarks.

GM and the Treasury Department were able to get key concessions from the unions and major bondholders in the past two weeks. Those deals paved the way for a cleaner bankruptcy process, one that a senior administration official said Sunday could allow GM to emerge from the bankruptcy process in only two to three months.

GM will use the trip into bankruptcy court to shed the plants, dealerships, debt and other liabilities it can no longer afford. Emerging out of bankruptcy quickly will be a "new GM," made up of the four brands that GM will keep in the U.S. market -- Chevrolet, Cadillac, GMC and Buick -- as well as many of its more successful overseas operations.

This is the same process that Chrysler LLC used in its bankruptcy process. Chrysler filed for bankruptcy April 30, and the judge in that case approved the creation of a new company that will be run by Italian automaker Fiat in a ruling Sunday.

GM, being a larger, more complicated and global company than Chrysler, is not expected to have its valuable units exit bankruptcy quite as quickly, though.

The new GM will have only $17 billion in debt, rather than the $54.4 billion it owed as of March 31. The unions' new contracts with the company and GM's underfunded pension funds will stay with the new company.

But for the turnaround to be successful, both outside experts and company officials agree there needs to be improvement in U.S. auto sales, which have fallen to a 26-year low this year.

GM has been hit harder than most of its competitors during the sales slump. The company's U.S. sales through April were down 45% from a year ago, compared to a 37% decline for the overall industry.

GM also faces tough competition from Toyota Motor (TM) and Ford Motor (F, Fortune 500), which are both in much stronger financial condition.

Even though Ford has reported years of losses as well, it had far more cash on hand than GM or Chrysler going into this crisis. The same is true for Toyota, which reported a loss in its recently completed fiscal year.

GM's decision to shed its weaker brands and dealers is expected to lead to further market share losses, which could result in the company giving up its long-time position as the largest automaker in terms of U.S. sales.

The company already lost the global sales title to Toyota last year, and it could soon fall behind Toyota and possibly Ford in the U.S. as well. To top of page