You Can’t Get Different Results Doing The Same Thing

I remember the first time I saw a venture firm discuss a bridge loan for a portfolio company that was struggling. I was 26 at the time and I had recently joined Euclid Partners and Bliss McCrum, one of the two founding partners, was arguing that the firm should not put more money into the company unless we extracted some commitments from management to change the way the company was being run. He said to the assembled partnership, all four of us, "you can’t get different results doing the same thing." He was right, we forced some cost cuts, some management changes, and we did the bridge. I honestly don’t know if that bridge worked out or not, it was 21 years ago now, but I remember the conversation vividly, like it happened yesterday.

That lesson has never left me and whenever we do bridge financings, it comes right back to the front of my brain and the tip of my toungue.

So when I was reading today that the Bush administration is going to bridge the auto companies to the next administration and the next congress, I thought, "ok, but what committments are they going to extract from the companies and the union?"

In the front page story on the auto bailout in today’s NY Times, I learned the following:

Mr. Corker said Republican senators were also insisting on steep
cuts in wages and benefits that would bring the American automakers in
line with United States-based employees of Toyota, Nissan and Honda. And he said that the Republicans wanted a firm deadline, sometime in 2009, for the automakers to carry out those cuts.

It
was over that point that the talks deadlocked, with the union pushing
for those cuts to take place after its current contract expires in 2011.

Alan
Reuther, the chief lobbyist for the union, said labor leaders back in
Detroit were astonished at what Mr. Corker was attempting to accomplish
— a virtual rewriting of the U.A.W. contract, which typically takes the
better part of a year to negotiate. “That’s one thing that our folks in
Detroit were just amazed at,” Mr. Reuther said. “Does Senator Corker
really think he can do a restructuring of the industry in six hours?”

If I am not mistaken, a bankruptcy filing would invalidate the contract with the union anyway, so I’m with Corker and the republicans on this one. GM is losing $4.4bn per month!! That’s a boatload of money and everyone involved, including the unions, are going to have to make some sacrifices to get GM back in the black. And I personally don’t think that parity with US-based employees of asian auto companies is asking that much.

And most of all, I don’t think the White House and congress, whether it be the lame ducks in power now or the incoming crew, should be loaning taxpayer money to the auto industry without extracting exactly the kind of concessions that the republicans in congress are asking for.

It’s one thing to be pro-union (I am at times) but it’s another thing completely to be using taxpayer money to protect an unsustainable cost structure that is partially based on above market labor costs. I really don’t know why it takes a year to negotiate a union contract, but if they want to auto industry to survive, the union leaders ought to be prepared to rip up their current contract and negotiate a new one over the weekend. That’s how things are done when you are on the verge of going out of business and losing $4.4bn per month.

I’m all for a bridge and a bailout of some sort (I think doing it via DIP financing in a managed bankruptcy would be best), but most of all I hope everyone remembers that you can’t get different results doing the same thing. And you can’t invest new money until you rectify that situation. And it can’t take a year to do it.