The 17% solution: GM merges with the UAW - part one
(This is the first of a two-part post. Please don’t yell at me until you’ve read Part II)
An earlier post describing the GM/UAW VEBA deal mentioned that the convertible bond which the UAW is taking as part of the funding for the VEBA could, if converted to common stock, make the union one of GM’s largest shareholders.
Correction: now that the details of the deal are being revealed, it turns out the UAW VEBA could be THE largest GM shareholder, by a rather wide margin.
If the union converted the bonds, it would own 17% of the shares of GM. You may also bet that the agreement restricts GM’s ability to issue additional shares, so that the union’s stake can’t be watered down.
Two years ago, GM was beset by the takeover attempt of corporate looter Kirk Kerkorian. Recently, a Russian mafia figure, Oleg Deripaska, bought 5% of GM’s common stock, apparently trying to follow in Kerkorian’s footsteps. GM beat off Kerkorian, but it was a distraction. Having a real Russian mafia hoodlum, a buddy of assassin, ex-KGB boss, and Russian premier Vladimir Putin, as a big shareholder in the company hasn’t received a lot of publicity. But it can’t be fun for GM’s top brass.
But, no more worries.
The UAW is here.
Nobody is going to make a play for GM when the UAW could end up owning almost 20% of the company with the stroke of a pen.
GM just bought protection. And it got it at a very reasonable price: free.
Stock market analysts have been critical of the GM/UAW deal, now that the bloom is off the rose and details of the agreement are being revealed. Yet, many of them still don’t seem to understand the deal. They don’t seem to understand the financial details and they don’t understand the real effects of the deal for the company.
To understand this deal, you have to understand where things stood before the deal.
Before the deal, GM owed – over time - $50 billion to its retired employees. That, by far, was its biggest debt. Worse, it was unliquidated, meaning it could grow over time if health care costs grew, as they usually do. So that $50 billion wasn’t a hard number. It was an accountant’s guess. If you wanted to figure out what the company was worth, the first thing you had to do was analyze that guess.
If the company wanted to figure out how much it could spend to develop new cars, the first thing it had to do was analyze that guess. Because management of a public company has to worry about the stock price, it behooved management to guess that number would be low, which would make the company worth more. But guessing low also meant that it would have to double its bets for future years, because guessing low was just postponing the expense to later years. So, you ran a bigger loss in those later years than the actual operation of the company would have accumulated. They really were “legacy costs:” they were the legacy of management postponing the recognition of a loss to later years.
That approach has been the pattern of GM’s management since at least 1990.
That’s over now.
Whether analysts like the deal or not, the GM liability for retiree health care costs is now a set figure. There are contingencies which can expand or contract it, but only within limits. The company can plan for the future without having to reserve against that which cannot be anticipated. That which cannot be anticipated is largely now the problem of the UAW and its retirees. (Feel not sorry for them, for they have had a free ride for a very long time.)
So, GM has bought protection against the Russian mafia and other takeover artists and it has also created a set number against which to measure its earnings.
That’s the proverbial two birds with one stone.
What’s in this deal for the UAW?
Real job security.
Most of the current commentary has focused on the benefits to members, as traditionally understood: “job security,” “job attrition,” the “jobs bank.“
In truth, there isn’t a lot of the traditional UAW job security in this deal, at least as understood in traditional labor-management terms. GM will be closing some plants and expanding others. Some GM workers will either take pay cuts or get dismissed at a price. There’s nothing new in any of that.
What is new is the ownership of GM by the UAW.
This is not the type of ownership that exists in Germany, where Volkswagen has to put up with union members on its board of directors for no better reason that that the quaint law of that land says so. This is the type of ownership that real Americans understand: bought and paid for. Real money.
The UAW ends up with bonds which it can, should it wish to do so, convert to 17% of GM’s stock. It doesn’t have to exercise that option to have influence, anymore than your wife has to complete the implicit threat to bring your attention to the “honey-dew” jar. But, if push comes to shove, a pen stroke gives the UAW an ownership in the company which, if not outright controlling, is certainly controlling with the cooperation of one or two institutional investors.
That’s new. That has never before happened in the history of organized labor in the United States.
But, in reality, it had already happened. GM’s past management had so burdened the company with limitless labor debt that the UAW really did own GM. The current deal merely defines its role.