Delphi Corporation, while it operates under Chapter 11 bankruptcy protection, submitted a reorganization plan with the court. Under the said plan, a consortium of hedge funds will invest up to $2.6 billion. The consortium was led by Appaloosa Management and participated by General Motors. The latter has conceded to provide funds for a part of the pension and health care liabilities of Delphi Corporation. However, the negotiations are made complicated by some significant factors including the uncertainty of Delphi's business value and its capital structure.
Stuart C. Gilson; Sarah L. Abbott
Harvard Business Review (208069-PDF-ENG)
January 09, 2008
Case questions answered:
We have uploaded two case solutions, which both answer the following questions:
- What key challenges does Delphi Corporation need to address in the reorganization? Did Delphi really need to file for Chapter 11 or should it have tried an out-of-court restructuring?
- How well did GM do in negotiations with Delphi?
- How effective are the concessions made by UAW? Why has UAW agreed to these concessions?
- How well does Appaloosa do under the reorganization plan? Did Appaloosa’s involvement help or hinder the reorganization process?
- In your judgment, is the plan of reorganization a good plan?
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Case answers for Restructuring at Delphi Corporation (A)
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1. What key challenges does Delphi Corporation need to address in the reorganization? Did Delphi really need to file for Chapter 11 or should it have tried an out-of-court restructuring?
According to the Delphi Corporation management, the main reasons that led to the bankruptcy and eventually need to be addressed are the unsustainable U.S. legacy liability and operational restrictions coming from the labor and GM contracts, the highly competitive environment in the U.S. leading to lower sales for the “Big Three”, which are Delphi’s main customers and the high commodity prices.1 Changing the latter two are not in the hands of the Delphi’s management, thus reducing the $12.8 billion of hourly pensions and OPEB, which in 2007 are estimated to produce a $1.9 billion cash outflow,2 was the main goal of the restructuring. Further, renegotiating labor contracts would also allow them to sell off “non-core” assets and keep the necessary operational flexibility to succeed in the future.
An out-of-court restructuring is often considered faster and less costly. However, the main advantages of Chapter 11 are access to DIP financing, an expedited process for selling assets, and the ability to renegotiate unfavorable contracts. The latter is particularly important in this case giving Delphi’s management negotiation power with the unions they can threaten to petition the court to void its labor contracts under Sections 1113 and 1114 of the U.S. Bankruptcy court. An out-of-court restructuring attempt would most probably not have led to such an improved negotiation position.
2. How well did GM do in negotiations with Delphi?
In addition to ending unfavorable labor contracts Delphi’s management also wants to terminate unprofitable contracts entered with GM, both in terms of pension and OPEB obligations as well as supplier contracts. Delphi Corporation and GM intensely negotiated from the point when Delphi filed for Chapter 11 (October 2005) to November 2007 when the two parties reached an agreement. Both parties brought several petitions to court over the course of these 2 years, trying to improve their negotiating positions. These petitions included among others…