Essay About Use Of Excess Cash And Pension Plan Liabilities

Equity Research Report
Other than using the proceeds from debt issuing to “reduce considerably, or even eliminate” 24% of pension plan liabilities, General Motors can actionably try other different approaches in order to change this unfavorable situation.First of all, if GM still decides to continue making large contributions and covering the pension fund deficit to a notably large extent, they have several other methods to raise its capital:Use of excess cash, sale of assets, spinoff: The company has $37 billion of cash and marketable securities in 2002, which is more than 20% of its net revenue and almost doubled the amount in 1998. Thus, GM can take advantage of these excess cash to contribute on the pension plan. It is very easy to implement and cash surplus will then be used wisely. However, cash is the king for business which can improve liquidity and be used for capital expenditure investment, debt reduction, and etc. Thus, when the money is used for the purpose of improving pension asset, it also potentially increases its opportunity cost for not being used in other areas. Alternatively, GM can sell its assets, its stakes in other companies or divest its business unit (e.g.: spinoff) that is no longer a core competency to the company. Especially under a financial duress, divesture can also allow the company to rethink of its portfolio of assets, and then focus on what is vital to the business and get rid of the unit that underperforms.Retained earnings: It is the earnings that not paid out to the shareholders in the form of dividends. The company can then use it as a reserve for its growth, pay down the debt, or in our case, to contribute to pension plan. The company has approximately $10 billion earnings retained for each of the past three years, so a portion of them can be used to reduce the shortfall, but the shortfall will still exist. Also from shareholder’s perspective, the company does not use the retained capitals to grow its business, which means it may not eventually be able to generate the profit and maximize the wealth for shareholders.  Equity financing: It is another way to raise the capital and it is the most expensive one. Equity financing doesn’t require periodic repayments, and it lowers the leverage level of the company. Additionally, the equity had a very strong performance in 2003 and the investors were very positive to the market. However if doing so, GM will need to further lose its ownership and control of the company and it typically needs to share the profits with the shareholders. Lastly, since the objective of this financing is to fill in the gap of the pension fund, it still does not put the shareholders’ interests as their first priority.We rule out the plan to apply for a bank loan or to use previous years accumulated credit balances. Compared to the debt issuing, bank loan is costly and the bank strictly monitors the company’s operation and will routinely examine if the company complies all the covenants. Also, the company halved its pension contribution in 2000 and halved again in 2001, thus there was no credit balance could be forwarded to 2002 and 2003.