GM shares plunge on bankruptcy fears

The company faces so many problems, a Merrill Lynch analyst says, that bankruptcy isn't out of the question. Here's why it also may be unlikely.

The plunge is an astonishing moment in the history of the nation's largest automaker -- once so powerful that many people believed that, as the late GM president Charles Wilson was incorrectly quoted as saying in 1953: "What's good for General Motors is good for the country."

GM's slump helped the Dow Jones industrials fall nearly 167 points today and the overall stock market dip into bear-market territory after crude oil hit a new closing high of $143.57, up $2.60 from Tuesday.

Merrill Lynch analyst John Murphy said GM needed to raise up to $15 billion in new capital to get through 2008 and 2009. The company insisted it had enough to cash to get through 2008 and could sell assets and make other moves in 2009.

GM closed down 15.1% to $9.98. Shares of all automakers plus automobile parts makers and tire makers also fell.

Bankruptcy is "not impossible" if the U.S. auto market continues to slump, Murphy wrote. A GM bankruptcy would put all labor contracts at risk and take years to resolve and could cause problems for thousands of suppliers.

IS GM too big?There was extreme skepticism that bankruptcy would ever happen. The company is too big and important to the domestic economy, and investors, management and, ultimately, the federal government would probably get involved first.

GM has about 280,000 employees worldwide, with 140,000 in the United States.
Murphy cut GM to "underperform" from "buy" and lowered his price target for the largest U.S. automaker to $7 a share.

He also lowered his forecast for 2008 U.S. industrywide light vehicle sales for the third time this year and said the recent drastic decline in sales would likely to continue through 2009. He expects 14.3 million U.S. auto sales this year and 14 million units for next year, down from 16.15 million units in 2007.

Murphy lauded GM's vast restructuring strides but said three factors have combined to dwarf the company's best efforts:
GM needs for more capital to cope with slumping sales. Every drop of 1 million units in U.S. auto sales on an annualized basis means a loss of $3 billion in revenue for GM. "The financing necessary for the next two years is likely to be larger and more expensive than recognized," he wrote.

Weak sales will continue through 2009. The industry faces "a more severe downturn than even the most bearish industry observers expected," he wrote. Murphy lowered his earlier target of 14.8 million light vehicle sales in 2008 by half a million units.

GM's sport-utility-vehicle segment is on the verge of becoming obsolete, eating away at the company's profit potential, he said.

On Tuesday, GM surprised investors with a June sales report that wasn't nearly as bad as feared and sparked a dramatic recovery for the U.S. stock market. The stock was up more than 15% at one point before fading to a 2.3% gain.

Reported in US on July2, 2008