Mikey take note
GM's value higher than Ford's
General Motors is worth more than Ford.
Isn't Ford the hot automaker on a roll, gaining sales, posting profits,
riding the goodwill of a nation for avoiding federal life support and
sporting a stock price that's tripled in the past year?
And isn't GM the much-derided Government Motors, 61% owned by Uncle Sam,
shrunken from eight to four brands in a bankruptcy that wiped out the
Old GM shareholders, and still losing money as of its latest financial
report a week ago?
True on both counts, but strange as it may sound, GM is worth more than
Says the trading price of Old GM bonds, now called Motors Liquidation
bonds, which are trading for three times what they were worth before GM
filed for Chapter 11 bankruptcy.
Huh? Why would that be?
Ah, now comes the tricky part, based on funky math that I won't attempt
to explain here, except to say it involves partial differential
equations and the Black-Scholes formula, which I believe was developed
by an alien civilization.
Seriously, here's what's happened at GM, as explained to me by J.P.
Morgan credit reports and some big brains from the worlds of private
equity and President Barack Obama's auto task force.
The task force pushed GM into bankruptcy last June, wiping out common
stockholders and squeezing the holders of $27 billion in GM bond debt
into accepting a 10% share of the nebulous value that a future,
post-bankruptcy GM might achieve. Bondholders also got warrants to buy
more stock in a New GM if its future value exceeds $15 billion, and
again if it exceeds $30 billion.
That old bond debt, along with old lawsuits, contracts and other trash,
was dumped into Old GM, or Motors Liquidation.
The GM bonds no longer function as traditional interest-earning bonds,
but as bets on the future value of an initial public offering of stock
in the New GM.
Since GM emerged from bankruptcy, confidence in its survival and
possible rebound has grown. Bonds that were trading for a paltry 12
cents on the dollar a year ago rose to around 20 cents in November, and
last week traded at about 34 cents.
That trading reflects estimates that GM's total equity value may be
somewhere in the range of $50 billion to $66 billion based on its
current cash and debt and projections of future profits. By comparison,
the total market value of Ford stock was $45.4 billion, based on
Friday's closing price of $13.43 a share.
Plenty of ifs
So, because GM has more cash than Ford (Thanks, taxpayers!) and less
debt than Ford because of bankruptcy, GM is worth more than Ford? Yes.
• If GM can post operating profits of $8 billion this year, as Ford is
expected to do.
• If GM can deliver a couple of clean quarters of coherent financial
reports, without special charges or bankruptcy-related legal and retiree
costs, to build investor confidence before an IPO.
• If Wall Street stays enthusiastic about stocks and IPOs.
• And if the overhang of Uncle Sam's desire to sell its 61% ownership
stake doesn't unduly depress GM's future stock price.
Those are a lot of ifs, of course. So taxpayers, who have pumped about
$150 into GM for every man, woman and child in the USA, should not be
spending their refund checks for the rescue just yet.
Service Guarantees Citizenship