GM and Ford Pay Down Debt and Pile Up Cash -- But You Can't Please Everyone

Last Updated Nov 2, 2010 12:20 PM EDT

Recent actions by General Motors and Ford (F) to pay down debt serve as a reminder that car company shareholders need to be a patient lot. This is a simplistic and short-term view, but the more cash the car companies spend on getting their balance sheets in order, the less they can hand over to shareholders, and nowadays for GM, that includes U.S. taxpayers.

Of course, the car companies are being prudent to reduce their leverage when they can. GM and Ford both said recently that paying down debt now will save them billions of dollars in interest payments over the coming years, and clearly that's a good thing for shareholders, too. GM also has the additional consideration that it's about to launch an IPO.

GM said last week that after paying down debt and pension liabilities, it expects to have $24 billion as of June 30, 2010 in liquid assets including cash, marketable securities, and available credit. That's good news for GM's ability to fund its product development and for the company's ability to withstand any potential downturn.

However, the GM debt announcement made me think back to the late auto industry gadfly Jerry York and his deep-pockets patron, Kirk Kerkorian. York and Kerkorian provoked an auto industry debate back in the mid-1990s about the auto industry practice of building up big piles of cash in prosperous years, in order to ride out the bad years.

Instead of building up a rainy-day savings account, York wanted the car companies to address the cyclical nature of consumer demand for autos by building flexible manufacturing plants that could change models as demand changed. He also wanted them to quit acquiring extraneous brands or non-core businesses in the good years, only to be forced to sell them off in bad years.

In addition, York prodded the car companies simply to hand over some cash to shareholders, in the form of dividends. That's an understandable attitude, since Kerkorian at one time or another was a major shareholder, if not the No. 1 single shareholder, of all three of the domestic automakers, Chrysler, Ford and General Motors.

The issue of what to do with all that cash lying around seems like a quaint notion today -- after all, Chrysler and GM went bankrupt last year, and Ford came pretty close. Still, Ford has had several profitable quarters, and as noted, GM is starting to pile up cash. Eventually, the car companies are going to have to decide what else to do with it besides collect it.

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