General Motors Corp.'s disclosure of accounting errors has intensified worry that the automaker is slipping deeper into financial crisis and that the risk of a potential bankruptcy is growing.
In a research note yesterday, Ronald A. Tadross, an auto analyst at Banc of America Securities LLC, called a bankruptcy filing "inevitable" and put the risk over the next two years at 40 percent, an increase from a previous estimate of 30 percent. Tadross said he thought GM management could be held responsible for the accounting errors and, if the management team is shaken up, the option of a bankruptcy reorganization would become more likely.
Chief executive G. Richard Wagoner Jr. and Chief Financial Officer John M. Devine have ruled out the possibility the company will seek bankruptcy protection. Gina Proia, a GM spokeswoman, said the automaker has $19.2 billion in cash or other cash equivalents. She said it had no plan to file for Chapter 11 protection. Proia called Tadross's report "inflammatory and speculation."
Wagoner faced heat from the GM board of directors earlier this year when it pushed him to cut a deal with the United Auto Workers to reduce health care costs. He also must deal with Kirk Kirkorian, GM's largest investor, who is known for aggressively pressing management for changes that improve profits. Kirkorian, who owns 9.9 percent of GM's stock, reportedly is seeking a seat on the board to represent his interests. In the past two days, he has lost $133 million as GM share price fell.
In an SEC filing released Wednesday, GM said it estimates that its 2001 profit was overstated by as much as $400 million. The company said it erroneously booked so-called supplier credits as income in that year rather than in the future periods in which they were attributable. GM said it remains under SEC investigation for the supplier credits as well as other issues.
Prudential Equity Group LLC, in a research note issued yesterday, said it thought the practice of supplier rebates was employed by GM's purchasing team in the late 1990s and early 2000s.
GM's financial uncertainty worsened Wednesday when Fitch Ratings knocked the company's credit rating down two notches deeper into below-investment status. Moody's Investors Service earlier this month also further cut GM's credit rating. A rating cut signals the credit firm's belief that bondholders of GM debt are less likely to be paid in full and on time. In its latest cut, Fitch cited the risk of disruption in the delivery of auto parts from manufacturer Delphi Corp., which filed for bankruptcy last month. The rating companies have cited greater concern about GM's ability to implement its restructuring program, eroding market share and GM's ability to rebuild profitability. Yesterday, GM stock fell 4.5 percent, to $23.51 a share on the New York Stock Exchange. GM's share price, which was $40.30 on Jan. 3, is down 42 percent this year.
A Chapter 11 filing by GM would send shock waves through the U.S. economy. GM has 84 assembly plants and other manufacturing facilities in North America. The company employs 142,000 people in the United States and 325,000 worldwide. It has 7,300 U.S. dealers. Its brands include such iconic American names as Chevrolet and Cadillac. The automaker is the central hub in a system of thousands of interconnected businesses in nearly every corner of the U.S. economy. Chrysler Corp. was the last automaker to face the prospect of bankruptcy in the late 1970s and required a federal bailout to return to health.
Last month, Wagoner outlined a cost-cutting plan to turn GM around. The plan includes the agreement between GM and the UAW to cut health care costs. GM is also in the process of selling a controlling stake in its highly profitable finance arm, General Motors Acceptance Corp., which provides car and home loans. Analysts have valued a sale of a substantial part of GMAC at more than $10 billion.
Some analysts say GM's accounting problems are overblown. David Healy, an analyst at Burnham Securities Inc., described the recent accounting episode as a "tempest in a teapot." He said the supplier accounting error appears to be strictly a bookkeeping issue that was mostly a distraction.
"Unless there is some smoking gun -- some big thing they are not disclosing, I think that one will go away too," Healy said. "I don't think there is a great big ugly monster hiding under the covers."