On Tuesday, General Motors announced that they are willing to give American Axle over $200 million to avoid a probable bankruptcy filing. Does this seem like the blind leading the blind to you? (O.k., so the analogy is a bit off but the meaning is the same.) Does it make you feel good about how your tax dollars are being spent? Here is the proposed deal, and our theories on why GM is being so generous:
The specifics of the proposed deal are still being finalized but there are two major chunks.
• GM will pay approximately $110 million to help make up for monies that were due when GM filed bankruptcy.
• GM will loan American Axle up to $100 million. In addition to whatever interest rate they agree on, GM will get an option to purchase 7.4% of the company’s shares. If American Axle draws down the entire $100 million, GM would have another option to buy an additional 12.5% of the company.
So why is GM being so generous? We believe there are two reasons:
1.) American Axle is a huge supplier to GM on many critical components. They don’t want to risk disruptions in quality or supply if they go through a bankruptcy filing.
2.) They are highly confident they can make money on the deal. After having seen the creditor groups in both Delphi’s and Metaldyne’s bankruptcies gain ownership of the companies by turning their debt into equity at pennies on the dollar (maybe dimes), our guess is that GM felt the core business of American Axle is very solid and they might as well profit from this situation and have greater control over their short term decision-making.
Our biggest criticism of American Axle over the last 10 years has been their inability to reduce their dependency on GM. In this instance, that dependency appears to have been their savior.