General Motors is preparing a public stock offering… you know, because it’s primarily owned by the government and unions right now. The sale is expected to raise $10.6 billion, most of which is going to the government against the $50 billion bailout last year. Since government is literally us (I mean, the $50 billion didn’t come from some savings account the Fed has from working nights and weekends as a pizza delivery boy, right?), that means we are selling an asset we purchased with bail out money… back to ourselves… and then putting the money we took from our left pocket into our right and claiming to have paid ourselves back. Not sure, but I think there’s a nice big dollop of irony in there somewhere.
This is all well and good so far as socialist, potato-passing goes. I’m sure I’m not alone when I say that, while I don’t speak political gobbley-gook, I understand it just fine.
What bothers me here is the math. The plan is to sell about 365 million shares at between $26 and $29 each, raising an estimated $10.6 billion. This will value the company at around $48 billion which, surprise, surprise, is Ford’s capitalization. As a matter of fact, if the shares sell near the high end of the range, GM’s capitalization will be closer to $60 billion – which means bigger and, ostensibly, better than Ford. (Side note: Ford saw the problems ahead of time, made the difficult choices, accepted no public welfare, didn’t forever alter the bond market and our basic understanding of risk/reward investing, came through the worst economic times the auto industry had ever seen and recently reported record profits… but they’re market capitalization is the same as or less than GM’s? I suppose that’s the price you pay for actually thinking the rules of the market place should apply to everyone equally. Makes one wonder though, how happy Ford’s stock holders would be – and how much money they might be spending right now – if Ford’s efforts had been properly rewarded in the free market and they were not in competition with the US Government.)
Back to the math. Most of this ($10 billion) will be given to the government (us) and reduce our stake in the company from 61% to 40%. Ummm… if we gave GM $50 billion in exchange for 61% of the company, that values the company at $81 billion, not $48 billion. Further, I understand GM has already repaid $6.7 billion and when combined with the $10 billion from this public offering, the government’s (us) will only be owed $33.3 billion. Ummm… if that’s a 40% ownership stake then the company is valued at $83.25 billion… Okay, so I won’t quibble about $81 billion vs $83 billion and change; I mean, what’s $2 billion at this level. But $20 – $30 billion? Yes, I’ve got to quibble a little here. Either the market is vastly underestimating what GM is worth (and apparently it’s almost twice the company Ford is), OR our 40% ownership stake is only worth about $.25 on the dollar.
You know, I seriously don’t mind when others try to mislead me and I’m not much offended when I get force fed a whole bunch of obfuscation from the government , but when you mess with the math you insult me on a much deeper level. (Note: I may hold math a little more sacrosanct than most. I see in math the core of philosophy, music and precision; I look at math and I see poetry.) Listen, it’s not like this is differential calculus; it’s basic multiplication and division. Don’t stand there and tell me 2+2=5! As Mr. Brady is fond of saying: “I am cursed with the knowledge that two plus two does, in fact, equal four.”
I don’t know about anyone else, but I’m not buying shares in a company run by people who think they’re so smart math doesn’t apply to them. In the end, the math of the free market does apply, and it is always right.
Brian Brady says:
“I am cursed with the knowledge that two plus two does, in fact, equal four.”
…which is why I didn’t grasp this the other day and had to read this 3-4 times. Let me see if I understand this:
1- The market says the our current stake is worth $30B
2- After the offering, the amount owed us is still some $30B
Did we perhaps “loan” them the money via a convertible debt deal? I didn’t follow the train wreck that was the fastest corporate BK in history
November 11, 2010 — 10:05 pm
Sean Purcell says:
If you had to read this 3-4 times, I did a pretty poor job writing it…
According to the NYT News Service, the government decided to sell “about one-third of its holdings for $26 to $29 a share after a 3-for-1 stock split…” which was more detail than needed for this post. The article goes on to say that “at the high end of the offering’s proposed price range, GM’s market value could approach $60 billion, exceeding the $48.9 billion capitalization of Ford Motor.” In other articles I have read, a mid share price would put the capitalization at roughly the same as Ford Motor, which is the more conservative number of $48 billion that I used.
So… if we own 40% of the company, and the company is capitalized at $48 billion, our share is worth $19.2 billion… which is actually 58% of what we’re owed ($33.3 billion), or $.58 on the dollar. I went with a little license when I said $.25 on the dollar because the $6.7 billion already “paid back” is reputed to have come from non-recourse Fed funds given to GMAC and subsidiaries. Discounting this bit of “funny money”, our actual unpaid loan of $40 billion, now calculated to be worth $19.2 billion (see above) equals roughly $.25 on the dollar.
Or… to use simple math again (which is what so irritates me about this particular shovel full of government gobbley-gook), the US taxpayer is receiving $10 billion from this stock offering and dropping its share by 21%. Well, that makes sense because $10 billion divided by 21% equals $47.62 billion, which is right in line with the company’s expected capitalization after the public offering. But this leads to an obvious question: how is it that our initial $50 billion loan only gave us a 61% share? After all, $50 billion divided by 61% equals a market capitalization of $81.97 billion.
IOW, you either accept that a $10 billion payment equals 21% of the company, in which case the company is worth roughly $48 billion (I won’t even get into the absurd notion that GM’s market capitalization is or should be equal to that of Ford’s), OR you accept that a 61% share of the company was equal to $50 billion which puts the capitalization at almost $82 billion. But you cannot accept both.
For a more interesting take on this, especially for an old bond trader such as yourself, read Bond Prices Suggest GM Stock May be Overvalued in IPO from The Wall Street Journal. Investors are willing to pay $.34 on the dollar for GM’s primary bond, which does not bode well at all for the stock offering. The article points out that while Ford (which recently offered up record earnings) is trading at 6x earnings (PE ratio), GM’s stock offering suggests that it is worth 11x earnings… God Bless the new math.
November 11, 2010 — 11:13 pm
Sean Purcell says:
PS – It having been over a decade since you were a bond trader and I was an options trader… Where the heck is Michael Cook? Maybe he can share some light on this…
November 11, 2010 — 11:18 pm
Brian Brady says:
You did a fine job writing it; it’s the deal that’s fuzzy.
I can’t understand how the common stock is trading as high as it is. Is there an unknown buyer, quantitatively easing into a clandestine position?
November 12, 2010 — 12:04 am
Tom Johnson says:
May I venture a guess that the union pension funds end up with a big chunk of this IPO to give them a direct tap into the US treasury and the GM boardroom? After all too big to fail once is too big to fail forever.
It goes like this: GM stock falls dramatically because the unions prevent management from cutting wages and benefits to compete throwing the union pensions into even worse actuarial insolvency. But, the federal pension guarantee system is so underfunded that a UAW pension insolvency would wipe out the pension guarantee system. This effectively gives the UAW drawing rights from the taxpayer and GM will never have to cut wages to effectively compete in the marketplace.
The US Treasury will be forced to pump up the UAW to keep GM stock from cratering and exposing this fraud. Question: Does the new Congress buy in to owning a nationalized GM or will they have the courage to kill it off once and for all?
November 12, 2010 — 6:53 am
Michael Cook says:
Lets not forget about China and other government entities. I am not sure if China owns the White House yet, but I am sure it will be on the auction block soon enough.
There is no question this is an overvalued rush job, but I would also not be surprised if there were other obligations beyond the equity. There are probably guaranties and other debt type obligations in process to recoup the full amount of the valuation. Not to say, that will actually happen, but I am sure its not as simple as if the stock goes down the government goes away with $0.25 on the dollar.
I will do some more research over the weekend and keep you posted.
November 12, 2010 — 12:50 pm
Brian Brady says:
Thanks MC
November 12, 2010 — 1:06 pm
Sean Purcell says:
From Michael’s lips to god’s ears (lower case “g” because I’m talking about the gods of market manipulation). WSJ is now reporting that SAIC Motors, a large, quasi-national auto maker in China, is reportedly interested in buying a stake in GM. This news has caused speculation that the price of the IPO might go north of $30/share.
Hmmm, a stock IPO that is severely overpriced (not just according to the grade school math we’ve looked at, but more importantly according to a bond market that does their pricing based on future value) is now in danger of going even higher thanks to a large investment from China… A China that must find ways to send US currency back to the US, but a China that is also rumored to desire a decrease in it’s purchases of US Treasuries. I thought they’d start buying more commodities, but if the US government is willing to take a 50% to 75% hit in order to sell GM to the Chinese – how can they pass it up?
The plot thickens…
November 12, 2010 — 1:44 pm
Don Reedy says:
I’m coming back here Monday morning hoping Michael has some added insight.
Here’s an old math puzzle, Sean and others. See if the result allows you to understand Sean’s premise.
NOTE: SEEMS I AM UNABLE TO MAKE A SUPERSCRIPT, SO a2 is really a representation of “a squared”, and similarly, b2 is a representation of “b squared.”
Let’s begin:
a=b
(Multiply both sides by a)
a2 =ab
(subtract b2 from both sides)
a2-b2=ab-b2
(Factor the left side of the equation)
(a+b)(a-b)=b(a-b)
(Divide both sides by (a-b)
(a+b)=b
(Since a=b, a+b=2b)
THUS….
2b=b
2=1 Really???
And here’s my point…
Math, “Sean’s poetry”, simply does not mislead. But as you see from the above, manipulated it not only misleads…it misinforms.
Michael, Sean, Brian…..point us in the direction that clarifies and solves this misaligned equation of values. See you on Monday….
November 13, 2010 — 9:50 pm
Sean Purcell says:
a=b
4 = 4
(Multiply both sides by a)
a2 =ab
42 = 4×4
(subtract b2 from both sides)
a2-b2=ab-b2
42 – 42 = 4×4 – 42
16-16 = 16-16
0 = 0
(Factor the left side of the equation) You mean both sides, right?
(a+b)(a-b)=b(a-b)
(4+4) x (4-4) = 4x(4-4)
8×0 = 4×0
0 = 0
(Divide both sides by (a-b)
And here’s the problem! One cannot divide by 0… The rest of the proof is superfluous… much like the attempts to tell us GM is worth one price, yet our investment is worth another.
🙂
Thank you for a most informative and enjoyable game. You are, as usual, dead on in your analogy Don.
November 14, 2010 — 12:03 am