Delphi and GM: To Buy or Not to Buy?

Many of you are aware of the recent news about Delphi filing Chapter 11 bankruptcy. A friend of mine who works for Delphi assures me that this is one of the better things that could have happened for the company. He says that the bankruptcy will allow them to renegotiate their union contracts, renegotiate their sales contracts, especially with GM, and remove the enormous pension liabilities they had on their accounting books. He suggests picking up shares of Delphi at a bargain 30 to 40 cents a share and esimates a rise of at least $2.00 a share in the next two years.

There is good news for Delphi in that that no longer have the pension liability. Their new CEO, Steve Miller, has a strong history of working with distressed companies like Bethlehem Steel.

According to the Economist, the combined liability of GM and Delphi's pension liabiltiy is about $450 billion. This is insane and might finally be a wakeup call to people who think that their pensions will be around when they retire. Even more reason to take steps to secure alternate means of retirement protection, like investing in an IRA. But this does not seem to be good news for either company.

GM has also announced that they are negotiating hard with the Union of Auto Workers (UAW) to get concessions and cuts in order to just stay afloat. With falling sales, increased raw material costs, and these continuing liabilities, they may not be around much longer. Some say their chance of filing chapter 11 is at least 30% now that Delphi has done the same.

Should you buy the Delphi stock? Or even GM? It is risky. Because of the Chapter 11 filing, the people who hold Delphi's bonds get first dibs on any money produced by the company. The shareholders get whatever is left. Any money/dividends paid out to shareholders will only be made after the debt obligations can be settled. Because a stock's value is based on its perceived future dividends, the stock will probably remain low for quite some time (it has actually been delisted from the NYSE. It now trades on a "stock clearning house," basically for pennies on the dollar). Will Delphi rise again? They make good parts, they have a lot of customers, they also might get paid for what their product is worth, now that they can restructure their contracts. Miller also has a fairly good track record. He's even decided to take a salary of $1 a year. I'll let you be the judge.