GM Can Purr After Tune-Up

Updated with closing stock prices

General Motors ( GMGMQ) could emerge from bankruptcy as soon as Thursday with a promising outlook.

New GM will have coveted brands like Chevrolet and Cadillac. It will control close to 20% of all U.S. vehicle sales, down from the 51% share in 1962, but not so bad for a new business. Its costs are lower, its debt has been reduced and it will likely have sailed through a complex bankruptcy in just 39 days -- despite the 850 objections raised in court.

"Operationally, financially, GM will be in a much better situation than three months ago," says Tom Libby, an independent auto industry analyst. "They are going to be all right," says John Wolkonowicz, senior auto analyst at IHS Global Insight.

GM's emergence comes as the auto industry is seemingly starting to recover from a low point in the auto-sales cycle, with seasonally adjusted annual domestic vehicle sales around 10 million, based on June sales figures. The last time North American vehicle sales slipped below 10.5 million was 1982, when they totaled 10.3 million, according to J.D. Power. The last time they were below 10 million was 1970, when sales totaled 9.8 million, J.D. Power says.

"The industry will recover," Libby says. "It will go back up to 12 or 13 million and then to 15 million, but nobody knows when that is going to occur. What GM has to do is to keep their break-even at 10 million, which is what they have said they will do. They have to be rigorous and disciplined in not allowing their costs to rise."

A second job now is to sell cars, particularly to the former customers of Pontiac, which sold 88,794 cars in the first half of 2009, or 9% of all the vehicles GM sold in the U.S. The Pontiac brand is being discontinued.

"GM has a strong product lineup," says Wolkonowicz. "The key thing will be to convince the American public that their quality is as high as it actually is. The talk on the street is that American cars aren't much good, because perception in the market place always lags reality. So this will take them five to 10 years."

GM Through the Years

Bruce Belzowski, associate director of the University of Michigan Transportation Research Institute, says GM also a third task, which is avoiding the long litany of past management mistakes, such as intra-company rivalries and glacial decision making. "They've done a good job of getting rid of excess dealers, reducing fixed costs, and maintaining a good working relationship with the UAW," Belzowski says. "But how are they going to manage the new company?

In particular, "they have to create a new small product development cycle, and they have to get the fuel efficiency gains they need to meet 2016 goals," he says, adding that GM is ahead of Chrysler in bringing fuel-efficient cars to market, but is behind Ford ( F), "which has a little better time frame in terms of when they need to have smaller cars on the road."

New GM will have just four brands, including Buick and GMC, and just four owners. It will be 60.8% held by the U.S. Treasury. Remaining shareholders will be the United Auto Workers Retiree Benefits Trust with 17.5%, the governments of Canada and Ontario with 11.7%, and bondholders in the former GM, who will have 10%. The bondholders and the benefits trust will also hold warrants for 15% and 2.5%, respectively.

The company is expected to be listed on the New York Stock Exchange, under its former GM symbol, in 2010. Most shareholders, particularly the Treasury, have made it clear they do not want to hold the shares for long, so sometime next year investors will be making decisions on their value.

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Of course, the hint of a promising future is for future shareholders only. Investors in GM shares will almost certainly get nothing, although the shares will continue to trade as unprofitable GM assets are moved to a new company called Motors Liquidation, which will continue to move through a Chapter 11 bankruptcy process.

Surprisingly, those existing shares closed Wednesday at 84 cents, up 25%, despite the company's reminder last week that they are most certainly worthless. Ford shares closed at $5.35, down 3%.

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