General Motors (GM) on June 2, 2009 suspended trade on the New York Stock Exchange. One of the big three automakers and an icon in American business since 1908, the collapse and subsequent filing for bankruptcy has illustrated General Motors’ inability to keep the company profitable and viable. In requesting from the US government financial assistance, General Motors has transitioned to Government Union Motors.
GM was once considered a stable investment with a stock history that had shares trading at $61.25 during June 1999, $45.62 during June 2004, $17.68 during June 2008, and prior to the stock suspension dipped to a mere twenty-seven cents a share. The value of the stock loss is staggering and indicative of GM’s inability to streamline costs and increase sales in an economy that was in a downturn direction. Unfortunately, when GM does emerge from bankruptcy, that common stock will be worthless.
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The United Auto Workers have played a part in the financial burden that ultimately caused the collapse. At the center of some of the greatest costs to GM are the health care costs, especially to retirees. The cost to GM was a staggering six billion dollars, keeping in mind that there are approximately two, to maybe three retirees for every UAW worker in GM.
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Wages too, were very cost prohibitive for GM. How can a company continue to be profitable when wages are 60% of a company’s total labor expenses? The UAW cannot be held accountable for the collapse of GM, but rather be viewed as an important factor, which lead to bankruptcy for the auto giant.
While the government did step in to keep GM afloat, funds did not come without conditions, stipulations and government control. There were conditions to this government bailout in order to ensure that GM has a structured path to financial recovery.
Under the agreement for the new GM to be formed, the term General Union Motors starts to become apparent. The proposed agreement with the President Obama administration will allow the GM pension plan to remain unchanged. The union-run trust fund set up will award retirees 17.5% of the new company stock. The trust fund will hold 6.5 billion in preferred stock and one note of 2.5 billion dollars. Hence the same workers now become stockholders in the new GM.
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Yet the road ahead is filled with challenges for GM to quickly emerge from bankruptcy and bring back market share that has been lost. GM is downsizing and shedding plants, people and car divisions. GM is selling off divisions such as Hummer and Saturn.
The leaner GM must have a new image to convince people the GM vehicles are fuel efficient, environmentally friendly, and trendy. Investments in new technologies and designs that appeal to an affluent market who have seen GM as less than a status symbol will help GM to again flourish, perhaps not as the formable giant of the past, but a company that is stable, profitable, lean and a source of pride for Americans.
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It’s 20/20 hindsight now, but investors in GM could have protected their investment strategy for GM with stock options. A put option can be considered “stock insurance“, preventing a large loss in the event a stock’s price drops significantly. Investors with a diversified portfolio can purchase put options on indexes and protect their investments with portfolio insurance. A put option on an index can provide cheaper insurance than purchasing a put option for each individual stock in a portfolio. Investors can combine a protective put option strategy known as the married put strategy with an income generating strategy like the covered call investing strategy to generate monthly income while protecting against a large loss. Whatever your investing strategy, stock options can aid you in structuring your portfolio to best suit your needs.
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[tags] New York Stock Exchange, automakers, United Auto Workers, UAW, bankruptcy, President Obama, Hummer, Saturn, GM, General Motors Corp. [/tags]