Employee-buy-out: worthy but fraught with difficulty

Who said that the credit crunch did not create some innovative ideas apart from government bailouts for a variety of industries. It is fairly obvious that the car industry in general and GM in particular are in difficulties. And so are GM’s European subsidiaries. The German one is called Opel. For some time now German politicians have been eager to help Opel survive the storm but have mostly shied away for fear that any “German money” would ultimately flow through Opel to its American parent company.

Last week some very interesting proposals for saving Opel have been voiced. Rather than a full-scale government rescue, two groups of stakeholders in the company – namely employees and Opel dealers – might inject sufficient cash in order to both keep the company afloat and keep it running as an independent car-maker.

Without any doubt, it is a worthy goal to save a company from the effects of the global credit crunch not by primarily calling for government help but by bringing in stakeholders. However, the difficulties with such an approach are both technical and economic in nature.

The technical problems certainly start with the mere fact hat Opel does – put bluntly – not even have a cash account of its own. All patents and the supply-chain are generally GM’s. So disentangling the two is most likely to take years rather than months.

The economic problems are that the incentives just are not right. It is the most basic principle of portfolio strategy not to put all eggs in one basket. But turning ordinary employees into shareholders into shareholders is even worse for one pools both the income and the asset risk in one basket so employees might lose both their job and their wealth at the same time. That is one of the main reasons while even smaller-scale schemes for aligning worker and shareholder incentives by turning the former into the latter have mostly flopped and the most common form of employee participation to be found in practise is some kind of profit-sharing agreement. What would make matters even worse is the fact that the car company is most likely in need of severe restructuring including job losses. So if anything, a not-too-small number shareholders-to-be would have to opt for joining the lines of unemployed in order to keep the company afloat. Not a pleasant thought that.

One Response to "Employee-buy-out: worthy but fraught with difficulty"

  1. Andreas Botsch   March 10, 2009 at 4:31 pm

    David Milleker’s analysis is short and sharp. It follows from his conclusions that employee buy-out is not an option and the only choice available is government rescue or bankrupcy. Given the importance of the car industry for German GDP (the value chain including suppliers, dealers and services represents close to 20 per cent) one might tag it systemic for the economy. Subsequently, government rescue might be the cheapest item in store to keep the economy afloat.