GM Rising: Who Should Get Credit?
Malcolm Gladwell hates private equity.
Mr. Gladwell, the author of “Blink” and “Outliers,” recently wrote a review of Steven L. Rattner’s book about his tenure as the nation’s car czar. The review, in The New Yorker, is notable less for Mr. Gladwell’s view of Mr. Rattner’s book, “Overhaul,” than for a provocative and profound question that pervades the article: Can financiers ever do anything beyond financial engineering?
With General Motors planning an initial public offering for Thursday that values the once-left-for-dead company at more than $50 billion, the answer to that question is more than theoretical.
How did G.M. become one of the greatest turnaround stories, at the moment at least, in history?
The conventional wisdom, of course, is that G.M. was turned around by a group of White House-imported private equity and restructuring experts, “Team Auto,” led by Mr. Rattner.
But Mr. Gladwell doesn’t buy it. Instead, he makes a contrarian argument that G.M.’s newfound success is a result of a man long forgotten: Rick Wagoner, G.M.’s former chief executive.
Mr. Gladwell cites Kristin Dziczek, of the Center for Automotive Research, estimating “that the ‘new’ G.M. is roughly 85 percent the product of the work that Wagoner, in concert with the U.A.W., did in his eight years at the company and 15 percent the product of Team Auto’s efforts.”
To Mr. Gladwell, “that seems about right: car companies stand or fall, ultimately, on the strength of their product, and teaching a giant company how to build a quality car again is something that can’t be done on the private equity timetable.” Mr. Gladwell says that Mr. Wagoner “took the world’s largest company from an uncompetitive monolith to a worthy competitor of Toyota and Honda.”
Under Mr. Wagoner, the company went bankrupt, literally. Without the assistance of taxpayers, G.M. wouldn’t exist.
While Mr. Gladwell may be revising history to be provocative, his observations say a lot about the way much of the public still views the buyout world. Indeed, the private equity industry and its many lobbyists have been fighting for years to prove their value to the public, producing all sorts of studies and white papers to back up their claims.
And yet, Mr. Gladwell gets to the nub of the image problem confronting the industry in the blink of a sentence (pun intended): “The mythology of the business is that the specialists who swoop in from Wall Street are not economic opportunists, buying, stripping and selling companies in order to extract millions in fees, but architects of rebirth.”
In truth, G.M. would be worth a lot less, even after the restructuring, if its cars were all lemons. Mr. Gladwell is right about that. And Mr. Wagoner and his team should be given credit for the vehicles that G.M. has on the road today.
Mr. Gladwell, however, then goes further, suggesting that the turnaround was “an act of financial engineering.” He said Team Auto “used the power of the bankruptcy process to rid G.M. of some of the liabilities that had been holding it back.”
He’s right: the GM turnaround is ultimately an act of financial engineering. While “financial engineering” has become an expletive of sorts, in this case it is actually a good thing. Indeed, G.M.’s turnaround should become a case study for when and why the private equity and restructuring business can work.
That’s not to say that private equity is perfect. It often falls short. Of course, it’s rare that the private equity industry develops new technologies or industry-redefining products. But that’s not its mandate. And all too often private equity firms leverage up companies with too much debt, making it difficult for them to meet their obligations.
But just as often, private equity firms make the hard decisions that current management can’t — or won’t — make. For all the credit that Mr. Wagoner may deserve for G.M.’s auto lineup, he wasn’t able or willing to cull failing brands like Pontiac, for example, or get his arms around out-of-control legacy costs.
That’s when private equity makes sense. Mr. Gladwell makes a lot of the fact that neither Mr. Rattner nor Mr. Wagoner’s chosen successor, Edward E. Whitacre, came from Detroit or knew a thing about the automobile industry. (He could say the same thing of G.M.’s new chief executive, Daniel F. Akerson, another private equity man, from the Carlyle Group and a former telecommunications executive, or some of G.M.’s directors, including David Bonderman, the turnaround specialist who co-founded the Texas Pacific Group.)
But for certain companies — and only in certain circumstances — there is something to be said about bringing in an outsider with this credential on the résumé: financial engineering experience.