GM shares rise, but will it be enough for taxpayers?

Posted by: David Welch on November 18, 2010

Shares in General Motors are a pretty hot item. The stock opened today at $35 a share just a week after GM and its bankers decided to price the deal at $33. It closed at $34.19 a share and was originally slated to sell for between $26 and $29 a share. After two weeks of pitching investors, GM and the Treasury Department saw so much demand that they raised the price and decided to up the size of the IPO by 31% to 478 million shares. Including the overallotment option, which lets the banks take even more shares to sell to eager investors, they could be selling 550 million of them. Since it takes a share price of $43.67 a share for the government to break even on the remaining $40 billion investment in GM, one must wonder, what was Treasury thinking by putting even more shares into the deal?

Assuming it all sells as planned, the government will still own 500 million shares in GM, which is 33% of the company. To break even, those remaining shares must sell an average price of $53.07 in the secondary offerings, according to data compiled by Bloomberg. That means GM stock needs to take a 61% runup before the secondary offering for the feds to break even. It’s not unheard of. Ford stock is up 65% this year. GM has made a profit of $4.8 billion in the first nine months of this year despite a wretched car market. So some investors have said that they see potential for a big jump over the long haul.

Here’s the other possible calculus. Let’s say GM stock runs up 20% between now and whenever the feds decide to launch the secondary offering. That means the stock sells for $39.60 a share. At that price, the government would be $13.47 a share short. On 500 million shares, the government would lose $6.7 billion on the investment. Can they justify $6.7 billion to save GM? Some would argue it’s a small price to pay given the jobs preserved at GM, parts makers, dealers, etc. The fact is, those who hate the bailout will hate it whether it makes a small amount of money or not, purely on the principle of the thing. The Center for Automotive Research estimates that letting GM and Chrysler fail would have cost the Treasury $28.6 billion in 2009 and 2010 in lost income tax and social programs anyway. They say we made a good deal. So no matter how the IPO pans out, the legacy of GM’s bailout — presuming the company performs as expected from here out — is fairly well settled.

Reader Comments

Emma Heuton

November 30, 2010 7:36 AM

It certainly a good news as General Motor is one of the prime names in automtive sector. But the issues of tax payers are still under question...

Marvin McConoughey

December 23, 2010 6:47 PM

The Center for Automotive Research is missing the larger point. Bailouts are contagious. One bailout leads to another, and soon one has a society that subsidizes a large population of firms that should live or die in the marketplace on their own merits, not on their political connections.

The lesson is clear: If you allow a firm for which you are responsible to behave heedlessly, there is still a chance for you. Cry to the government and beg for handouts.

Note that saving a job at GM or Chrysler may have no impact on American worker employment. If the GM job takes away a Nissan or Toyota job in America, all that has been accomplished is to punish a better-run plant and favor a less-efficient plant. That way lies national decline.

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Want the straight scoop on the auto industry? Our man in Detroit David Welch, brings keen observations and provocative perspective on the auto business.

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