Thursday, May 07, 2009

General Motors Shareholders Wiped Out!!!

Well, its official, General Motors shareholders have been almost totally wiped out. Makes them wish that the company could have gone into bankruptcy instead. As bad as the news is, unfortunately for the stock markets this is very good news. Markets like to see total restructuring, markets like to see inefficient companies being completely broken down and sold down the river. Markets like to see lots of employees losing their jobs and benefits. Markets have no conscience, no soul, its like the devil's game. I have one bank stock and one auto stock in my Marketocracy portfolio, and am still very happy with them, Bank of America and Ford.

Freund Investing :

It’s official; General Motors common shares are in their final death throes.

Yesterday, General Motors indicated its intention to seek a 1-for-100 reverse split on its common stock. If you’re wondering what a reverse split is, Investopedia has a fairly accurate definition and example:

A reduction in the number of a corporation’s shares outstanding that increases the par value of its stock or its earnings per share. The market value of the total number of shares (market capitalization) remains the same.

For example, a 1-for-2 reverse split means you get half as many shares, but at twice the price. It’s usually a bad sign if a company is forced to reverse split - firms do it to make their stock look more valuable when, in fact, nothing has changed. A company may also do a reverse split to avoid being delisted.

So what does this mean for GM shareholders? Well, if you own 100 shares at today’s closing price of $1.85, and if the reverse split were to happen tomorrow, your 100 shares would now be shrunken down to 1 share worth $185. Far more often than not, especially for companies facing serious trouble (as GM is), the $185 share price post-reverse split will drop fast and hard.

As far as I’m concerned, if you’re invested in GM, get out now. At $1.85 per share, the price is insanely overvalued. If you want American car manufacturing exposure, choose Ford. They aren’t treating their shareholders like dirt, and they actually have a viable business model without the support of the government.

Karl Denninger:

You didn't / don't hold General Motors stock, do you? If so, I hope you sell today, assuming it opens over 2 cents/share.

Seriously. No really, I'm not kidding.

It was disclosed that the GM "restructuring" would:

  • Increase the number of authorized shares to 62 billion (!)
  • Reduce the par value to one cent.
  • Effect a 100:1 reverse split for the existing shareholders.

The effect of this as disclosed would be that the existing common shareholders would have their holdings reduced in value to one percent of their current market value.

So as of 4:00 Eastern Tuesday, your $1.85 stock price would be.... drum roll please..... $0.0185 per share.

There is a lot of other material in this filing related to the restructuring of the debt. The exchange offers appear to have gone from 2/3rds reduction in the outstanding debt to a ninety percent reduction, effectively paying debtholders no more than a dime on the dollar.

Oh, and it gets better. If the "negotiation" is as was done with Chrysler, saying "no" won't do you a damn bit of good - the government will, I would assume, threaten you and then file an involuntary Chapter 11 and attempt to cram this down your throat.

The UAW does not get hit for 90%. The VEBA will get 50% in cash and the other half in stock - newly issued stock - which, of course, is part of the 99% you won't own when this "restructuring" is completed if you are a common stock holder as of last night. Their effective hit? Zero, assuming the share price does not collapse (again) when this is all said and done.

Oh, and if all this is not completed by agreement before June 1st? The filing makes clear: They're going to see the judge.

For those of you who were trapped in this position since GM was in the $30s and foolishly thought your stock had value, you were wrong. You're done; God (in the form of The Administration) has spoken and for you, the game is over.

Expect the price of the stock to collapse this morning. You did sell yesterday, didn't you?

PS: You think there's a thing called "senior debt" in this country any more? Uh, no. There is not. The Capital Structure no longer has ANY legal meaning. Guess what this does to the banks in particular (anyone with government "rescues") along with the potential for ANY firm in the U.S.? Yep.

p/s photos: Nozomi Sasaki


Little Bear said...

This is really confusing. If you have a reverse split, shouldn't the number of authorized shares in the company reduce rather than increase?

Salvatore_Dali said...

little bear, u r correct a reverse split is a shrinking of shares... the other side is a bonus issue, if a 100m share company do a 1 for 2 bonus, their shares would increase to 150m shares...

in GM's case the existing shareholders will do a reverse split, say 2bn into 20m shares... but that 20m is not the new paid up... there will be new shares issued to other parties, bond holders n gov etc.. which may bring the shares to 5bn, so the existing share holder will see a deep dilution into the new paid up... so their 2bn will become just 20m of the new 5bn shares.

see said...

Actually nothing new to local market cos we had our fair share of debt restructuring & capital consolidation & debtholders had to take debt for equity swap. only this time in US the scale is much much bigger.

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