GM Makes Sweeping Buyout Offer 3/23/2006

Shrinking Giant
GM Makes Sweeping Buyout Offer

Deal With Delphi, UAW
Lets Auto Maker Slash
Unionized Work Force
Clearing Out a Generation
By JEFFREY MCCRACKEN and LEE HAWKINS JR.
March 23, 2006; Page A1

General Motors Corp. reached a landmark buyout and early-retirement program yesterday with the United Auto Workers and parts supplier Delphi Corp., marking a major step toward shrinking the unionized North American auto industry.

But for GM, it is not the end of the painful overhaul facing the company after nearly two decades of losing ground to Asian and European rivals.

Under a complex deal worked out in weeks of talks, GM agreed to finance early-retirement packages and buyouts to be offered to as many as 131,000 GM and Delphi workers -- including all 105,000 of GM's current UAW-represented employees in the U.S. The buyouts would range from $35,000 for those with the most service to $140,000 to certain others further from retirement age.

The buyout plan is one of the largest in U.S. corporate history. In effect, GM is offering to take off the assembly line a whole generation of workers hired in the 1960s and '70s when the company still dominated the U.S. auto industry.

But how many will sign up to leave is a big question mark. And even if many do, GM Chairman and Chief Executive Officer Rick Wagoner still faces a series of challenges that the big labor deal won't solve. In 4 p.m. composite trading on the New York Stock Exchange, GM's stock finished up one cent, at $22.01.


On Wall Street, the ultimate worry is whether GM can succeed where some big unionized steelmakers and airlines failed and restructure outside of bankruptcy court. GM has denied any plan to use Chapter 11 bankruptcy to shed its obligations under its current U.S. union agreements. But major credit-rating agencies have dropped GM's debt ratings deep into "junk" levels and warned that without a quickly executed turnaround plan in North America, bankruptcy is a possibility. One agency, Fitch Ratings, has warned that some debtholders could get 40 cents on the dollar in a GM bankruptcy scenario.

Among the challenges still facing GM is an investigation by the Securities and Exchange Commission into GM's accounting. Just last week, the company said it still is unable to file its annual report and added $2 billion to its net loss for 2005, widening it to $10.6 billion.

GM is also struggling to find a buyer to reinvigorate its big finance unit, General Motors Acceptance Corp. A wide acceptance of the buyout, by easing concerns about GM's viability, could speed a sale of a controlling stake in the finance unit. Groups led by two private-equity firms have made bids for GMAC in the $11 billion range.


And GM faces continuing pressure to halt a steady slide in its U.S. market share (to 24.4%, most recently) and beef up its product line.

For GM, the mass buyout is another milestone in a long retreat from the days when it dominated the U.S. auto industry with nearly 50% of the U.S. market, and dominated the American economy as the nation's largest industrial corporation. For nearly four decades after World War II, GM and the UAW set the standard for American industrial workers in terms of wages, health care and pension benefits, in an often contentious partnership.

GM workers, and their counterparts at Ford Motor Co. and Chrysler Corp., consistently earned more than the average American factory worker during the decades between 1960 and 2002, according to a study by the Center for Automotive Research in Ann Arbor, Mich. By 2002, UAW Big Three workers earned an average hourly wage of $25.95, or 69% more than the average manufacturing wage. Health-care and pension costs in recent years have risen even faster, pushing GM's total average hourly labor cost per U.S. factory worker to $74 an hour last year, according to a Securities and Exchange Commission filing.

GM's UAW members also enjoyed unprecedented protection from layoffs, thanks to a program called the Jobs Bank that guaranteed workers nearly all of their full-time pay even if they had no work to do.

But GM's high U.S. labor costs have taken a toll on the company and the UAW as Asian and European auto makers have ramped up production at nonunion factories in the U.S. and Canada. In 1985, when nonunion auto production in the U.S. was minimal, GM had 457,000 factory workers in the U.S. Today, GM has 113,000 U.S. hourly workers. (In all, its North American auto operations employ 173,000, and world-wide its work force is 325,000.)


Some of those jobs have been lost as GM emulated the efficient "lean production" techniques of rival Toyota Motor Corp. But others have been lost because GM has been unable to stop losing market share in the U.S., despite volleys of new models and increasingly expensive price and financing discounts.

Though it's unclear how many workers will take the buyout offers, yesterday's deal is noteworthy if for no other reason than the sheer number of people eligible. GM hopes the offers will get it most of the way toward its announced goal of cutting 30,000 hourly jobs by 2008. Delphi, which has about 34,000 hourly jobs, hopes to eliminate at least 18,000 hourly workers, including 5,000 who transfer back to GM.

The buyout and early-retirement offer is complex. In one of the main provisions, GM and Delphi workers with 30 or more years on the job as of Oct. 1, 2005 -- the week before Delphi's bankruptcy filing -- will be eligible to receive $35,000 to retire and receive a full pension and retiree health care. A UAW member retiring would receive a pension of about $3,000 a month. GM estimates that 36,000 of its 105,000 U.S. UAW hourly employees are eligible under this provision.

GM and Delphi workers with at least 27 but fewer than 30 years on the job as of this July 1 can get the equivalent of an early pension, slightly smaller, that starts right away. Workers with 27 years, for instance, would receive $2,800 a month until they reach 30 years. The deal includes full retiree health care. When they reach what would be 30 years with the company, they will retire and receive a full pension. Workers at GM plants that have been closed or soon will be can retire with 26 years on the job. Those include plants in Oklahoma City, Baltimore, Lansing, Mich., Linden, N.J., and Muncie, Ind.

GM is also trying to buy out younger UAW members. Those with fewer than 10 years of service could get a one-time $70,000 buyout in return for severing all ties with the company, including health-care and other benefits. Vested pension benefits wouldn't be affected. GM employees with 10 or more years of seniority will have the option of a $140,000 buyout under the same terms.

WALL STREET JOURNAL VIDEO


• Lee Hawkins talks about why GM's buyout and early-retirement program is a positive step for the company.

• CNBC looks at GM and Delphi's buyout plan with the United Auto Workers that includes early-retirement offers.

The offers will go out immediately, said the UAW. Workers will have 45 days to accept and then seven more days to rescind, said a GM spokesman, who estimated that buyouts and early retirements should start before June 1.

For those currently eligible for retirement, taking the $35,000 buyout would amount to accepting the value of a new Cadillac CTS sedan in order to retire and collect pensions now, rather than work a few more years. But for younger workers, the calculus of accepting $70,000 to $140,000 to walk away from GM, and give up the rich health care and comparatively high wages is more complex.

Especially in the Midwest, the number of manufacturing jobs that pay as much as GM and Delphi is small and dwindling. That's in part because GM itself is putting pressure on suppliers to shift operations to lower-cost countries such as China or Mexico. If enough workers leave Delphi, the company could find itself in a position where it needs to hire new U.S. employees. But Delphi Chief Executive Robert S. "Steve" Miller has said his company's U.S. hourly wages for future workers need to drop from an average of $26 an hour, not including benefits, to about $12.50 an hour.

Another provision of yesterday's agreement provides that workers at both GM and Delphi with 10 years of service who are over 50 will be offered "mutually satisfactory retirement." They will be able to retire with their accrued pension, plus full health-care benefits until Medicare kicks in.

GM's decision in 1999 to spin off the Delphi auto-parts business was supposed to help GM cut costs and steer the money it saved to designing better cars. Delphi, with about $28 billion in annual revenue, began life as a far-flung collection of operations making parts from seats to spark plugs to radios for GM vehicles.


Delphi tried to diversify its customer base, but found it a struggle to compete, given wage rates that matched GM's levels. These were far higher than even unionized parts makers in the U.S., let alone competitors based in Mexico or China. Last year, facing mounting losses and the fallout from accounting problems, Delphi's directors brought in Mr. Miller, a veteran of complex turnarounds at Chrysler and Bethlehem Steel, to try to salvage the company. In October, he decided Delphi should seek Chapter 11 bankruptcy protection.

In blunt language rarely used in public by senior Detroit executives, Mr. Miller declared that the days when UAW members could expect to earn more than $60 an hour in wages and benefits were over. Mr. Miller has since toned down his public comments, in response to objections from both GM and the UAW. But yesterday's deal represents a tacit recognition by the UAW that it can't hope to save the jobs that GM's market-share losses have effectively wiped out already.

At Delphi, as at GM, yesterday's deal left key questions unanswered. Among these were what the parts maker's remaining hourly workers will be paid and what they will do. The accord also didn't say which Delphi plants are to stay open or which products Delphi will continue making.

Delphi has thrice delayed a threatened move to ask the bankruptcy judge to void its existing labor contracts. Another deadline to do so looms on March 31. Delphi has said it would go ahead to void its labor contracts unless a complete deal with the UAW is reached. But the UAW and other Delphi unions have warned that such a step might provoke a strike. A strike by such a large supplier of parts to GM could quickly shut down production at the car maker, too.

Though other Delphi unions weren't part of yesterday's deal, the company hopes to offer similar early-retirement plans soon to its other 9,000 eligible workers.

For GM, the buyout plan is the latest in a series of moves to cut its U.S. employment costs. The auto maker last fall negotiated a deal to curtail medical benefits for hourly retirees, and earlier this year cut retirement medical benefits for white-collar workers and effectively ended its traditional salaried pension plan.


There would also be significant accounting effects for GM from a mass retirement. The company would greatly reduce the liability it has already recorded for those employees' retirement costs, a figure that is based on assumptions about how many years they are likely to remain on the job. The liability cut would reduce GM's pension expense, resulting in an immediate boost to the bottom line. GM's domestic pension plan, which already has a $6 billion surplus, would become even more overfunded. (For more on this, see related story.)

In terms of GM's credit standing, the uncertain costs of the buyout plan won't immediately jeopardize the company's rating, agencies indicated, but neither will it boost GM's ratings. "Our primary focus is on Delphi's ability to reach a contract with the UAW so as to ensure no production disruptions, and we still don't have a lot of details as to what a restructured Delphi would look like," said Mark Oline, an analyst with Fitch Ratings. "If a [possible] Delphi strike lasted for any extended period, GM's liquidity would erode fairly rapidly."

Because of that, GM has a big incentive to provide more support to Delphi. GM is apt to be very much involved as Delphi and the UAW continue their discussions over plant closures and future production.

GM's fourth-quarter results included $1.3 billion in costs related to plant closings and a $2.3 billion guarantee to UAW members employed by Delphi. Those items reduced GM's bottom line by $3.6 billion, or $6.36 a share. GM has estimated its ultimate tab for bailing out Delphi will be between $5.5 billion and $12 billion.

Standard & Poor's said $2 billion that GM received by selling most of its 20.4% stake in Suzuki Motor Corp. should help GM fund the buyout program. But S&P cited other factors, such as "mounting Delphi-related costs [and] the likely slow progress this year in turning around GM's North American operations," that it said "add to the likelihood that GM's ratings could ultimately be lowered."

Among issues still on the table is how Delphi will deal with its underfunded pension plan. A pension contribution of $1.1 billion is due in June. Both the UAW and the federal Pension Benefit Guaranty Corp. would be likely to resist any attempt by Delphi to terminate the program. To terminate it, Delphi would have to convince the bankruptcy court that it can't operate without doing so.

The Delphi portion of yesterday's agreement needs approval from the bankruptcy court. Delphi is seeking an April 7 hearing. Delphi's creditors' committee -- including bondholders, suppliers and other parties -- has already signaled a willingness to challenge GM on some issues. The committee has a team of lawyers, accountants, investment bankers and others reviewing the terms of GM's 1999 spinoff of Delphi, to see if Delphi was doomed to fail by labor obligations and other agreements imposed by GM.

A GM spokeswoman, Toni Simonetti, said GM was "not in a position" to discuss the total financial impact of the deal on GM now. Whatever its final cost for the buyouts, it will be money the car company can't spend on much-needed new products or features such as gasoline-electric hybrid engines.

One reason large-scale buyout offers are tricky is that employers can't control how many, or which, employees apply. Management experts say the offers tend to attract the most capable employees, those who can most easily find jobs elsewhere. "You create incentives for the wrong people to leave," said Peter Capelli, a management professor at the Wharton School at the University of Pennsylvania. "The lowest performers are generally not the ones who take it up."

This may be less of a concern with assembly-line workers such as GM's than with salaried people. In any case, a buyout is GM's main option for getting its payroll costs down. If it laid off hourly workers, it would still be required, under labor contracts, to pay most of their wages and benefits.

---- Ellen E. Schultz and Scott Thurm contributed to this article.

Write to Jeffrey McCracken at jeff.mccracken@wsj.com and Lee Hawkins Jr. at