What the Hell Where They Thinking?

I couldn't believe this when I read it:

General Motors is open to considering moving its headquarters from Detroit, selling off U.S. plants and even renegotiating parts of its restructuring plan with its major union, the new chief executive said Monday....

A move by GM to leave Detroit would represent another blow for the economy of a region already reeling from the bankruptcy of Chrysler and the sharp downturn in auto manufacturing.

GM purchased its glass-towered headquarter building known as Detroit's Renaissance Center last year for $625 million.

The article moves on to other topics, but I was struck by this:  A year ago, when bankruptcy was only months away (delayed only by injections of taxpayer money), with the real estate market teetering at its peak and just starting to fall off, with GM hemorraging cash, GM decides to ... spend $625 million on Detroit commercial real estate.

This is outrageous.  All the more so because GM's fortunes and the value of downtown Detroit real estate have a beta coefficient that is probably well above 1.  In other words, if GM decides it wants to sell the building, Detroit commercial real estate is going to tank on the news that GM is leaving Detroit, making the real estate virtually worthless.  It is very dangerous to buy an asset for which you are the only possible buyer if there is any possibility you might want to sell it some day.

I understand that companies that have losing business models often find it more profitable to invest outside of their business**, but GM seems to have found the only investment on the planet worse than their own stock.

** Postscript: I am not a huge Roger Smith fan, but this was essentially his strategy -- GM sucks as an investment, so I am going to invest outside of the auto industry.  Though he caught a lot of grief for it, most of his investments outside of GM turned out to have a substantially higher return for shareholders than his (or his successors') investments inside of GM.   Wikipedia writes:

Smith's purchases of EDS and Hughes were criticized as unwise diversions of resources at a time when GM could have invested more in its core automotive divisions.

But what if investments in your core business are even more unwise?

  • m

    Maybe they did it last year to show their commitment to Detriot, allowing investors and the Federal Government to find it more palatable to give them money. Now, maybe GM is using this as leverage (basically holding the Detroit area hostage) to get the Feds to give them a better deal.

  • anonymous

    Perhaps there's another explanation. Perhaps buying was a better deal than leasing. Perhaps there would have been some major losses associated with vacating the building. Second-guessing the decision without all the information is as silly as second-guessing retention bonuses.

    Surely you don't think the people running GM are stupid?

  • ben

    GM sounds like a completely broken organisation if it can make investments this bad. Apparently, one person at or near the top gets a bad investment idea, like buying GM HQ building, and all the managers below him, some of whom I would hope can see what incredible folly that is, are unable to fix the mistake. That's a sign of a bad corporate culture. And this is real estate. Presumably decisions of similar quality are being made on vastly more complex subjects like car technology.

  • Dr. T

    I think m is correct. When you are hemorrhaging billions of dollars each month, tossing just two-thirds of a billion at downtown Detroit might get you enough brownie points to score more bailout money.

    GM has been grasping at straws for years, but its fingers have been covered with oil. It needed to use some grease-cutting soap, strip away the deadwood in management, hire some decent car designers, and replace all the unproductive but overpaid UAW workers. Apparently, GM management could not do this (or even think of this).

  • John

    Ans: You dividend the excess capital back to shareholders.

    But never was GM a real, independent corporation capable of executing this plan.

  • epobirs

    Yes but what would that building be worth in a better city? It may have been a bargain compared to a comparable edifice in a decent burg.

  • tomw

    They weren't thinking -- they don't have to. After all, they are recipients of a "Government Bailout" which almost surely guarantees their succes! Right? We were investing in sure things with positive ROI, right? Hello?!? Are you there? ...

    Oh, everyone left Detroit. I forgot.

    Boycott these union rent seekers. We don't need GM nor Chryco.

    Vote with your dollars, you can't get the bastid out for about 4 years... Frack GM & ChryCo. All they are doing is funneling money to the union.

    AND the union says they will sell their 55% of ChryCo... talk about confidence in your own company! Not.

    tom

  • Gil

    I think you should get the "h" out of "Where" in this post's title.