GM posts $1.3B Q2 profit as CEO steps down

8/13/2010

DETROIT - General Motors reached two milestones Thursday on the road to its corporate turnaround, reporting its best quarterly earnings in six years and announcing that its chief executive, picked by the Obama Administration last year to lead it after bankruptcy, will step down next month.

The automaker's second-quarter profits - $1.3 billion on worldwide revenue of $33.2 billion - exceeded expectations as GM was putting the finishing touches on an initial public stock offering.

The success of the stock sale will determine how much U.S. taxpayers will recoup from their 61 percent investment stake in GM, which resulted from the government bailout of the company a year ago.

Under the current terms, the Treasury Department would be expected to sell about a fifth of its shares, bringing the taxpayers' stake in GM below 50 percent, sources said yesterday.

As striking as GM's financial performance was in the second quarter, the company underscored its rapid pace of change when its chief executive, Edward Whitacre, Jr., said he would be leaving Sept. 1.

The announcement indicates the federal government's shrinking role in overseeing the company.

Federal officials said they had no involvement in the GM board's choice of one of its members, Daniel F. Akerson, as Mr. Whitacre's successor.

"I believe we've accomplished what we set out to do," Mr. Whitacre said. "We're going to have a smooth, seamless transition here."

The reversal of fortune for GM since it emerged from its government-sponsored bankruptcy last summer has been head-turning.

During last year's second quarter, in the midst of the worst U.S. auto market in 30 years, the company lost $12.9 billion on global revenue of $23 billion.

But since it was cleansed of debt and health care and other costs during its reorganization in Chapter 11, GM has been solidly profitable now for six months - a positive factor in how investors respond to its return as a public company.

In addition, the departure of Mr. Whitacre and the naming of a successor settles a potentially distracting question about the company's long-term leadership as it courts investors.

Mr. Whitacre, a 68-year-old former AT&T chief, was recruited by President Obama's auto task force, initially as the hands-on chairman of the GM board, along with a majority of other directors.

After three months, the board fired the acting chief executive, Fritz Henderson, and handed that job to Mr. Whitacre as well.

Mr. Whitacre had made no secret that he would return to retirement in Texas as soon as GM stabilized its operations and was on its way toward a stock sale.

"It was obvious that I was not going to be at GM for the long haul," he said yesterday.

Mr. Whitacre was willing to keep the chief executive job through the end of the year, but there was increasing sentiment on the GM board that naming a long-term successor would help the stock offering's reception by potential investors, according to one source.

While the company could file for its initial public offering as soon as today, it may wait a few days to incorporate additional language in the filing document about the change in management.

The actual stock would be sold later this year.

The offering could grow to as much as $15 billion, the sources said. They cautioned that the size would depend in large part on market conditions in the fall.

Officials at GM have said that they expect big demand from institutional investors for shares in the company.

With a significant reduction in the government's stake, GM could make the case more easily - which Mr. Whitaker has been pushing - that the company should not be regarded as "Government Motors," a label that has been a drag on the company, GM officials said.

The remainder of the government's holdings could be sold off over the next two to three years.

Other major GM shareholders, including the United Automobile Workers and the Canadian government, could decide to sell significant portions of their holdings as well.

GM has also lined up a $5 billion, five-year line of credit from an initial group of 10 banks - including Citigroup, Bank of America, JPMorgan Chase, and Morgan Stanley - to help provide an additional financial cushion, sources said.

Each of the 10 banks has committed to providing $500 million toward the loan, although that amount is expected to shrink as more firms are brought into the lending group.

The 10 initial banks also have been promised roles in managing GM's offering.

The choice of Mr. Akerson as the new GM chief executive was described by people familiar with the appointment as a move to ensure continuity.

Still, much of Detroit was caught off guard by the announcement.

"What is surprising is the timing, although Whitacre can now leave on a high note," said David Cole, head of the Center for Automotive Research in Ann Arbor.

"Obviously the board has a lot of confidence in his successor and his ability to continue executing the plan."

A Treasury statement said GM's change in leadership was a "commercial decision" and therefore "did not require any government approval."

In its announcement, GM indicated it had made big strides in several areas of the business, reporting improved sales and better transaction prices for its vehicles.

The most notable gains came in its core North American operations, which had been losing money consistently.

GM said it earned $1.6 billion in the region during the quarter.

The company also said it added more money to its cash reserves, which totaled $32.5 billion at the end of the quarter.