Why are the taxpayers only going to get a few pennies on the dollar for its GM investment? Its very simple math that goes something like this
The government effectively will get 60% of General Motors in exchange for $50 Billion in aid.
This, using standard investor math, means that GM has an implied value of:
50 Billion/.60 = $83.3 Billion
Currently (or as of last Sunday) GM had 610 million shares outstanding.
That means that for the taxpayer to break-even GM shares (in the pre-bankruptcy world) would need to be worth $136.55 PER SHARE (83.3 Billion/610 Million)
The lifetime HIGH for GM is $93.62 back in April 2000 when the going was good. So good luck with that.
Oh and to complicate matters the government will see its holdings diluted if the bondholders take the extra 10% that they were promised as part of setting up the bankruptcy filing. If GM is doing well one would assume they would exercise these options and taxpayer shareholders would get diluted.
In that case the taxpayer stake goes to 54% which means an assumed market cap of $89.3 Billion or a per share price of $146.39
So even if GM were to return to its lifetime high of $93.62 the taxpayer would only get back $34 Billion 0r 68% of its investment if GM got as BIG as it ever was.
This of course is impossible based on the Government’s own admission that they are structuring GM to compete in an economy where car sales are 33% less than they are now.
Sure these numbers are approximations and some of the debt might be repaid like a normal loan (and I hope most of it is) but you can tell that there is no way that the taxpayers will see even HALF of their money returned even if all the right things happened (in a short-period of time as President Obama doesn’t want to hold on for long).
Well look on the bright side. We got rust-protection and under-coating free with the deal and we know how important those are.
11 responses so far ↓
RR // June 3, 2009 at 3:56 am |
I didn’t bother with the math, I knew that Obama had no intention of making money on the GM and Chrysler deals. These were flat out payback moves for the UAW.
People complain about GWB, but he never offered up this kind of largess to the oil companies, banks or any other industry. Yet he was vilified for lesser moves. Yet I see little outrage at the favors just handed to the UAW.
There I did it, I stood up for GWB. Obama has turned me into a Bush appologist. I am going to throw up in my desk drawer now.
AL // June 3, 2009 at 6:35 am |
RR- it was GWB that bailed out GM. In fact, if my memory serves me correctly, the senate particularly voted against a bail out for GM. Bush, decided otherwise. I thought I would never live to see something like that, yet here we are.
Thom // June 3, 2009 at 8:19 am |
Bush may have started the GM bailout, by “loaning” them $13B of TARP money, but Obama greatly increased the bailout first by giving U.S. guarantees on warranties for new GM cars and then by giving GM another $50B for restructuring (as described in the article) in exchange for 60% ownership, which will likely be worth only something like $10-20B in the end. Bush pitched it and Obama knocked it out of the park.
Neela // June 3, 2009 at 4:19 pm |
Your math makes no sense to me. We are giving $50B and getting a 60% share…We will then own 60% of (old net value+$50B). E.g. we will now own 0.6* old assets + $30B. It is in fact saying we are no worse off if .6*old value=$20B, or an old enterprise value of $33B. That is still probably too much…but not as bad as $80B+
marcitz // June 3, 2009 at 4:34 pm |
No it means that we fell that 60% of the company in its current configuration is worth 50 Billion. We effectively bought 60% of the stock for $50 billion. That’s why the 50 billion/60% calculation.
Its like if I offered you $50 for half your car. That would imply it was worth $100.
Neela // June 4, 2009 at 10:56 am |
Again, faulty logic…the difference is if I gave YOU $50 for half you car it would imply its worth $100…but in this case I am making an INVESTMENT in your car, saying paying for $50 in repairs to then own half of the new, better car. Let me give you another example…say your friend Joe has a house in Oakland that he’d like to sell but can’t as it’s not up to code. It’s worth $100K, but needs $50K of repairs to make it saleable. The problem is he doesn’t have the $50K. You could offer to pay $50 for say 50% of the of the sale of the home once it is sold. You do the repairs and the home sells for $150K, you’re $50K investment is now worth 75K. You are both better off!
Again, your mistake is forgetting the cash paid becomes an asset(or reduces liabilities) for the new GM that the government now owns a stake in, it is NOT a purchase from a third party…
I am not sure how I can explain this any more clearly.
marcitz // June 5, 2009 at 7:13 am |
We are actually in violent agreement and please let me try to do a better job in summarizing.
– The investment made by the govermnemt says the old assets (pre-investment) are worth $33 Billion (old-assets to use your terminology and you are spot on). This is the “pre-money” valuation.
– The $83.3 Billion I mention is, in fact, the “post money” valuation (old assets + $50 billion investment, again you are spot on).
– The $50 billion does represent the possibility of increasing the value of the company moreso than just the basic $50 billion invested (because it goes to invent some cool new gizmo that returns a nice multiple as you implied)
My basic assertion, however, is that given past history (and yes “past history does not guarantee future performance”) there is no way for GM to rise to or above the current valuation that the investment has placed on it even by making great use of that investment to build that cool new gizmo. This is because even when, in the past, when GM was producing the cool new gizmo of the day (e.g. SUVs) and performing well it couldn’t reach a level greater than 70% of the level needed to make this investment whole. Its like the government valued it at the peak of its possibility and not where it currently stands with some reasonable assumed upside. I’m sure the investors in Google didn’t value it at $100 Billion (today its valued at $140) when making a late stage investment. Heck the IPO market didn’t even value it at a value near to where it is today. It had a GREAT idea but it still had to prove itself to get obnoxiously high valuations. GM got lucky and got that obnoxiously high valuation up-front (pre-IPO).
At the end of the day when GM gets out of bankruptcy and the equity stake can be sold by the government (either to the public markets or to private investors) the company needs to be worth $83.3 billion for the taxpayer investor to break-even (actually to lose money because that would imply no interest was earned on the investment over the 3-5 year time horizon) and I don’t believe it can especially given the stark shifts in basic demand in the automotive market.
Trust me, I hope I’m wrong because I own a piece of it. I’m not Rush Limbaugh hoping that Obama is a failure because then we all lose. I just can’t make it work logically.
Mike // June 4, 2009 at 12:35 am |
Anyone who thinks Obama gave all the money to to GM because of the UAW must be a 28%-er who forgets how it all started. For all that was given, the bankruptcy has effectively beaten down the UAW.
I would expect people spouting that crap to start blaming Obama for the war in Iraq and all the other bad stuff that happened as a result of the Dark Ages of the 2000s
robertsgt40 // June 4, 2009 at 8:54 am |
Screwed, blued and tatooed. There was never any intention to get OUR money back.(just as with the banks) This money will go to paying debt and relocation manufacturing facilities to China and other foreigners. Not to mention more jobs will be lost. Thanx Obama
EMD // June 7, 2009 at 11:56 pm |
GM stock will make that $136.55 when the dollar is devalued…..or maybe by a reverse stock split….tho I think it will go to ZERO
SocraticGadfly // July 11, 2009 at 11:55 am |
EMD, if the $$ devalues that much, GM stock won’t really be worth $136.
http://socraticgadfly.blogspot.com/2009/07/new-gm-sounds-lot-like-old-gm.html