Industrial-strength finance (Corporate Dealmaker)

Industrial-strength finance

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Stepping into a conference room overlooking New York's Plaza Hotel, Walter Borst, treasurer of General Motors Corp., offers a quick apology. He's running a little late.

On this particular afternoon, that is. But as Borst obliges a visitor with an account of his many assignments before becoming treasurer last February, it's clear that for the most part, his work life rolls along pretty briskly. It all started when he joined the company via the General Motors Institute, right out of high school. "You take five years - go to school half the time and work half the time," explains the soft-spoken Michigan native, who is 41. Stanford Business School was next. Then came a coveted spot as an analyst in the New York treasurer's office he now directs - and a shift into high gear, with stints in increasingly important financial and operational roles in New York and Europe. By 1999 Borst was back in New York as an assistant treasurer, managing the two-stage, $11 billion spinoff of GM's Delphi auto-parts unit. In 2000 he was off to Europe again, to wrestle with strategic issues as CFO of GM's big Adam Opel unit in Germany, a $17 billion company in its own right.

Not a typical résumé for a treasurer. But then, GM doesn't run a typical treasury operation. Sure, the treasurer's office does familiar treasury-type things, albeit on a vast, GM-type scale. It raises capital (witness the $17.9 billion bond issue completed in July) and manages cash ($29.3 billion at the end of the third quarter) and foreign exchange (about $40 billion in gross trading per year). Risk management and pension funding are part of the mix, too. "They have to do treasury for the company, obviously," says GM chief financial officer and vice chairman John Devine, who is Borst's boss. "That's sort of their day job."

But TO staffers - there are 130 of them around the world, with the majority in New York - are also deeply involved in shaping and executing GM's strategy. Treasury team members work closely with Devine, with GM chairman Rick Wagoner and with top operating executives around the world. They orchestrate the company's core capital planning process. Not least, the treasurer's office and its talent are instrumental in carrying out the constant flow of acquisitions, divestitures and other business development initiatives that are a part of life at the world's largest industrial corporation. "If we're in the middle of a negotiation, I'll just camp out there," says Devine, who is based in Detroit.

Organization of General Motors treasurer's office
John Devine, CFO

Walter Borst, Treasurer

Mark Newman, General Director	Rhodri Harries, Assistant Treasurer	Sanjiv Khattri, Assistant Treasurer
Pension Funding	Business Development	Domestic Finance	Risk Management
Regional Treasury Center, Asia Pacific	Regional Treasury Center, Europe	Capital Planning	Treasury Operations
	Capital Markets: Europe	Overseas Finance	Information Technology

Over the years the TO has often been at the center of the action in the world of M&A. That's one reason it's different from the treasury operation at, say, Ford Motor Co., where the 59-year-old Devine was CFO in the 1990s, and where the focus is more on traditional treasury work. But even more than that, what accounts for the TO's big reputation in the financial world is the list of people who have worked there. Wagoner is a TO veteran, as is his predecessor, Jack Smith, and indeed much of GM's leadership, past and present. And Stanley O'Neal, chairman of Merrill Lynch & Co., and Charles Golden, CFO of Eli Lilly and Co., are just two among the many TO alumni who have gone on to big things elsewhere. "I think the thing that would really distinguish us from many companies is the track record of the people who have been through the office," says Devine.

The records of the people currently in the TO are illuminating, too. In time-honored fashion, Borst and his lieutenants all started there young and rotated up through a series of progressively more demanding jobs around the world, both inside and outside the TO's ambit. As a result, they've spent the past decade implementing the huge course-correction Smith and Wagoner have led since GM's historic management shakeup in the early 1990s. Their efforts have moved the company along a trajectory that's as clear as it is financially and culturally challenging: Refocus on the capital-intensive car and truck business, and build market share around the world. At the same time, strengthen the balance sheet and meet the huge capital obligations that pensions and other legacy costs impose.

Borst's work on the Delphi separation, for example, helped GM reach a major milestone in its complex tactical retreat from vertical integration. TO general director Mark Newman was previously CFO of Shanghai General Motors - a joint venture at the heart of the brightest growth story in the whole company. Now he's back in New York, dealing with the pension liability that is GM's biggest headache. "It keeps life very interesting," says the 40-year-old Newman, a trace of his native Jamaica in his voice.

Rhodri Harries, a 40-year-old assistant treasurer whose biggest current responsibility is business development, worked on the New York-based research team that developed the China joint venture proposal in 1993. In 1996 he was in Europe, helping to recapitalize Saab to boost its global sales; in 2000 he was in Asia, structuring the complex deal that would eventually land choice pieces of South Korea's bankrupt Daewoo Motor Co. for a GM-led consortium. Two years after that Harries was in New York, managing the sale of GM's defense vehicles business to General Dynamics Corp. for $1.1 billion in cash. "A great business," says Harries, born in Britain but raised, like Newman, in Canada. "But it was noncore."

And Sanjiv Khattri, 39, the office's other assistant treasurer, followed up a six-year period in New York with another staff job (doing worldwide business development out of Zurich) and an operational one (as controller at the U.K. Vauxhall unit). A native of northern India, Khattri now has a long list of responsibilities in New York, including oversight of capital planning and domestic and overseas finance. It was Khattri who led the massive bond issue last summer, with most of the proceeds going to close the pension gap. Khattri says the company would have been able to fund both its pension obligations and its product programs - but that wasn't necessarily the perception in the market. "We asked ourselves," says Khattri, "is there some way to take pensions off the table?"

The answer turned out to be yes, at least for now. At the end of last year, the unfunded pension liability stood at $19.3 billion. The bond issue - essentially a means of exchanging looming pension obligations for some longer-term ones - reduced the shortfall by $13.5 billion. And with strong asset returns this year and the final, $3.8 billion leg of the Hughes Electronics Corp. selloff finally likely to close, GM expects to have its pension-funding problem largely erased in the short term. All this frees GM to concentrate on other things, such as restoring its European operations to profitability, building on its success in Asia, enhancing global product coordination, and trying to improve upon the $3.9 billion operating profit it earned on $186.2 billion in revenues in 2002. At the same time, it can continue with the vital cultural migration - away from the hierarchy, bureaucracy and inward focus that produced a company crisis back in 1992 - underpinning all its efforts.

Wagoner rarely misses a chance to exhort GM-ers to "Act as One Company." And nowhere in GM has the cultural change been more important than within the TO. "We're now a closer part of the company," says Borst. In the past, he explains, an operating group needing capital for a transaction or other project might come to the TO very late in the process. "We'd say, 'Well, you haven't thought about this, that and the other thing,' which would set the transaction back. It made for a somewhat adversarial relationship. These days, I think we're in a much better position. The operations know we're willing to add value, and they're more willing to bring us in on the ground floor of a transaction. And then when we get to the recommendation stage, it's a joint recommendation."

How do you integrate financial creativity and control, residing mainly in a corporate-level staff, with operational know-how and tactical savvy, residing largely in the business units? It's a familiar issue at most big companies - but GM has been wrestling with it longer than most. The TO's roots trace back to the 1920s, to legendary GM chairman Alfred Sloan and the development of the modern corporation. Based in New York (where Sloan and subsequent GM chairmen spent at least half their time, up until about 1980) the TO was created to impose financial control and strategic rationality upon the sprawling collection of acquisitions from which dealmaker William Durant forged GM in the first place.

Somewhere along the way, GM developed the most important component in the TO apparatus: The high-pot. Translated from the GM-ese, the term means "a young person with high potential," and the TO's leading role in recruiting and developing such people for the company has remained a constant over the years. Louis Hughes, chief of GM's international operations in the 1990s (and runner-up to his friend Rick Wagoner for the company's presidency), recalls what it was like to be one back in the late 1970s. "We were classic Masters of the Universe," says Hughes. "Young, aggressive, very hard-working. We thought we knew everything." Now retired from GM, Hughes is especially proud of two high-pots he brought in from his alma mater, Harvard Business School: Wagoner and Merrill CEO O'Neal.

If the TO exemplified GM at its clever, can-do best, it could also represent the company at its arrogant, bean-counting worst - sometimes on the same day. "The TO did lose its way," says veteran auto industry analyst Maryann Keller. "The math became more important than the industrial logic, which is why you saw these absurd spending sprees in the 1980s." Indeed, that was the period when the TO was responsible for a striking example of financial innovation in support of a strategic wrong turn: the creation of the tracking stocks that enabled then-chairman Roger Smith (another TO veteran) to bet heavily on diversification by buying computer services company EDS and then aerospace company Hughes.

Today, of course, almost all of GM's nonauto operations have been sold. The presence of Devine - a prominent figure with a strong reputation on Wall Street, brought in by Wagoner and Smith as a vice chairman in 2000 - is one of many indications that GM's financial culture has changed. And the TO itself is different too, in ways both obvious (there used to be four assistant treasurers; now there are two) and subtle. Much of the change came under Borst's predecessor, Eric Feldstein, now 44 and running GMAC, the financial unit whose earnings (expected to top $2 billion this year) are outstripping those of the automaking operations.

Obviously the TO remains a force, both within the company and on Wall Street. Last summer's massive bond issue offered a reminder, if any were needed, of how deep GM's pool of financial talent is. The deal was put together in just six weeks - a remarkable pace for an issue involving 11 transactions in six tranches, three currencies, three primary banks, 16 book-runners, and a 45-bank syndicate. "It was like being able to compete in 12 Olympic events at once," says Morgan Stanley Vice Chairman Bob Scully, a long-time GM banker who advised on the deal. At the busiest times, Khattri was able to put 60 treasury staffers on the project. "I moved into a hotel near here for the last two weeks," says Khattri. It was worth it. In the end, worldwide demand approached $50 billion - more than GM's market cap.

Still, today's TO Olympians know that automaking is a team sport. "We're very clear," says Khattri. "GM designs, produces and sells vehicles. Everything else is to support that."

In recent years the TO has been particularly supportive in Asia, where rapid growth and a welter of GM alliances and partnerships give it plenty to do. It's the most active region for what you might call an alliance strategy - except that would make it sound simpler than it really is. "Each company has a much different role in terms of what we're trying to do with them," explains Devine. "We do some things together, but more important is what we can do with each of the companies individually."

The regional treasury center in Singapore has a strong business-development orientation, a contrast with the other big regional center in Brussels, which does less development but manages GM's global forex book. Coordination with the operating side is made easier by the fact that GM's Asian headquarters is also in Singapore. "The treasury group has even gotten into some areas of the business that aren't pure treasury," Borst says. "Top management says, 'They're here, they're talented, let's use them.'"

The work Rhod Harries did on the Daewoo Motors acquisition offers a glimpse of the complex choreography between operations and finance. The deal unfolded over a period of years, complicated by politics, labor relations, and Daewoo's bankruptcy, among other things; at one point, in 2000, Ford actually won an auction for the company with a $6.9 billion bid, only to walk away. Finally last fall came the purchase of some key Daewoo assets in Asia and Eastern Europe by GM and a coterie of partners, including Shanghai Automotive Industry Corp. (its Chinese JV partner) and Fuji Heavy Industries Ltd., in which GM holds a 20% stake. GM's financial contribution to the deal was $250 million, but at least as important was the effort it put into structuring the new company. Harries made his main contribution as Asian regional treasurer, a post he held from 1999 into 2001; his predecessor and successor in that job worked on Daewoo as well. "There were multiple rounds of discussion, multiple phases, a number of proposals submitted. At any given time there might have been 30, 40 or 50 people working on it. We were part of that larger deal team, working hand in hand with our operating guys in Asia," Harries recalls. "Basically my job was to focus on the financial structure and then help develop and negotiate the deal structure."

Daewoo was a lengthy deal even by auto-industry standards, but most GM transactions do take awhile. The TO's goal is to be invited into projects early on.

Generating those invitations is a long-term process, accomplished partly through some adjustments in the way the TO manages its people. Human resource issues have always been a major focus for the office's leaders, who track every person who goes out on assignment to make sure they're getting the right mix of experience. Nowadays, advancing high-pots are routinely advised to take operating jobs, the better to understand the businesses they're supposed to support, and to build the personal networks it takes to be effective in a global company with 340,000 employees. Some staffers come back, others don't. Both kinds make the TO more effective. "We've got a very good [alumni] network," says Borst. "These individuals may be running a region, or running sales and marketing, or whatever. And while they can't do the deals then themselves, they recognize that there's an office here in New York that is good at these things, where they probably still have some contacts."

Recruiting, another TO priority, has changed a bit too. Along with targeting top business schools, the TO has always recruited within GM. "But I think we're doing more of that now," Borst says.

Not that the GM recruits get any special consideration. They face the same rigorous process as all the other candidates. Mark Newman knows all about that. "I've got to tell you," the managing director says. "I was working with GM for seven years when I came to interview here, and I found it a little bit disconcerting."

Today Newman is deeply involved in the hiring process, along with the two assistant treasurers and nearly everyone else in the office except for Borst. Newman, Harries and Khattri all visit multiple business schools to talk up the opportunities at GM, and all say the TO's New York location and cosmopolitan atmosphere help it compete with banks and consultancies for talent. Lower-level staff follow up with campus interviews, producing a list of 40 or so candidates who are invited to New York for the office's annual "Super Weekend," two days of solid interviewing. Aspiring high-pots have to write a case study and talk to a cross-section of TO people, including a member of the front office. "At the end of each day we order in a few pizzas and we sit down and go through the results," says Newman.

The yield? Another 10 or so new hires, eager to climb the ladder at GM. They start as analysts, doing two or three 12-month rotations; move on to a couple of rotations as a manager; then (if all goes well) a similar period as a director. Then it's out into the broader GM world, perhaps to return later.

It's not an easy path - there are performance reviews twice a year, and those who aren't doing well are asked to leave. The pay is good, but not dazzling. "The way we reward performance here is with a promotion," says Newman. "Unlike an investment bank, where you pay huge bonuses." Still, it's a path that can rapidly lead to some interesting places - as Walter Borst, and also Rick Wagoner, can attest.

Code name? Big Boy, of course

How does GM see itself as a dealmaker? A statuette marking the company's 1999 purchase of a 20% stake in Fuji Heavy Industries Ltd. offers one indication. It's a huge youngster in checked overalls - symbol of a well-known restaurant chain - hoisting a tray with one of Fuji's Subarus where you'd expect to find a hamburger. "We had code names," explains GM assistant treasurer Rhod Harries, who helped negotiate the $1.3 billion deal during his stint as Asian regional treasurer. "And we, of course, were 'Big Boy.'"

Made in a spirit of fun, the trophy has some obvious truth to it. Company strategy, after all, calls for GM, already the world's biggest auto maker, to aggressively pursue market share around the world.

Yet GM's capital constraints mean that those gains won't come on a platter, silver or otherwise. The Fuji deal is one of a complicated series of alliances meant to enable GM to develop and market cars globally without the expense and management challenge of acquiring entire companies. And a majority of the 30 or so transactions GM has done since the beginning of 2002 have, of course, been divestitures, as the company seeks to concentrate capital in the right places. "Capital allocation is key for us," says treasurer Walter Borst. "All parts of the business want capital; we need to find out how to deploy it to get the best possible returns for shareholders."

A simple principle to state, but not always such an easy one to apply. Which is what makes the work of the treasurer's office - key player in both the capital planning and deal-execution processes - so pivotal.

It is GM's top executives, of course, who set strategy and drive the whole deal process. However, as CFO John Devine points out, strategy and tactics are closely intertwined. "Knowing where you want to go is certainly important," he says. "But strategy quickly blends into what you have to do and the issues of execution and the individual parts of negotiating."

Harries - the senior-most person primarily focused on dealmaking - describes the process this way: "We really like to determine up front what our negotiating parameters are. There's a lot of interaction with senior management and with our board, so that when we get to difficult stages we know how to handle them - whether we want to be more flexible, or hold our ground."

Harries spends around 75% of his time on transactions, with the rest going to other responsibilities, such as his oversight of the Brussels treasurer's office center. Reporting to Harries is business development director Mike Kanarios, who leads about a dozen people in New York. A further nine people work on business development in Singapore and Brussels. Add in the ongoing attention of top bankers at Citigroup Inc., Goldman, Sachs & Co., J.P. Morgan Chase & Co., Merrill Lynch & Co., Morgan Stanley and the other financial firms GM routinely taps, and the company has ample resources upon which to draw.

On acquisitions, the TO's business development team works closely with the appropriate operating executives. "On any kind of a deal - unless it's a very narrow financial transaction - you really need the deep involvement of the operating people," says Devine. "Not only in the implementation phase, but in the strategic, the thinking phase."

Thus, Harries teamed up with the Asia-Pacific leadership on the complex deal that led to the 2002 formation of GM Daewoo Auto & Technology Co., in which GM holds a 44.6% stake. What was Harries' main contribution? "I like to think of it this way," he says. "Our operating guys are very income-statement focused, and we [in the treasurer's office] are very balance-sheet focused."

GM Daewoo - which the company co-owns with Shanghai Automotive Industry Corp., Suzuki Motor Corp., and creditors of the bankrupt Daewoo Motor Co. - also shows the complexity of GM's many alliance and partnership arrangements. General Motors has equity stakes in Japan's Isuzu Motors, Fuji Heavy Industries and Suzuki, and in Italy's Fiat Auto SpA. On these relationships, too, operating executives (along with the corporate-level automotive strategy board) take the lead. But there's still plenty for the TO to do.

Harries played a big role, for example, in the restructuring of Isuzu in 2002. That deal, in which GM invested a further $505 million in the Japanese company, took its ownership from 49% down to 12% but guaranteed GM's access to Isuzu's diesel-engine operations while protecting it from Isuzu's financial problems.

More recently, Harries' work helped GM reach a key agreement in October with Fiat, where it currently holds a 10% stake. That agreement postponed until early 2005 the start of a five-year put that may or may not entitle Fiat to demand that GM buy the rest of it. The companies still disagree on the validity of the put, which FIat hopes not to exercise anyway; but meanwhile Fiat has bought time to continue with a restructuring and a collaboration both companies value. "Making money in Europe is not easy," says Devine. "So to the extent you can help on the cost side through important synergies, it's very useful to both companies."

Divestitures typically mean a bit less intra company choreography, and a larger role for the deal executers in the treasurer's office. Harries led the sale of General Motors Defense (maker of the Army's Light Armored Vehicle) to General Dynamics Corp. late last year for $1.1 billion in cash, having first analyzed the situation with the head of the division making the sale. Since the executives at the defense unit itself were going with the business, they were less involved.

Not all the divestitures have been quite so straightforward. The sale of GM's remaining 19.9% economic stake in Hughes Electronics Corp. to News Corp. for $3.8 billion, now likely to close by year-end, saw multiple twists - notably the thwarting of GM's first buyer, EchoStar Communications Corp., by antitrust authorities. Devine is running that one himself. So, why EchoStar? "On balance - and this was a board decision - it was viewed that Echostar had the best deal," says Devine. The regulatory hurdles were considered, of course. "But the thinking was the deal could get done."

On both of those divestitures, as on much else it does, the TO used investment bankers - Goldman Sachs for the Defense divestiture and Merrill Lynch for the Hughes sale. Though the TO runs its own deals, it still values the industry and market perspective the bankers bring to the table. Deal advice, moreover, is just one of a spectrum of services that this giant company gets from the financial community. The TO keeps tabs on who does what for it and then acts on the information when a really big deal - such as last summer's $17.9 billion bond issue - comes up. Says Borst: "There was a lot of time spent on this floor until late in the evenings making sure we had the right mix between who could best execute this for us on the one hand, and who should we be rewarding on the other, based on insights they've given us for the deal, ongoing service, and credit that they provide the company."

On Wall Street, too, the Big Boy moniker has a lot of truth to it. - Kenneth Klee

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