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?