GM to Issue Additional Shares to Pay Off Debt

[Z-06]

[source: Left Lane News]

GM to Issue Additional Shares to Pay Off Debt

A filing with United States securities regulators has revealed that General Motors will issue up to 60 billion additional shares in an attempt to pay of government, bondholder and union debts. The plans would essentially wipe out the holdings of its remaining shareholders - and since the United States government will become the majority shareholder, only the Treasury's approval would be necessary.

Analysts have long predicted that GM shares will be essentially worthless regardless of how the automaker restructures; this massive, unusual issuance of stock would further devalue current shareholders' stake. Stock investors would have just 1 percent of the restructured automaker.

The filing says that once its bondholders and the union have been paid off, it would unleash a 1-for-100 reverse stock split; existing shareholders would be wiped out.

GM's stock is already down about 43 percent since the beginning of 2009, trading under $2.00. The automaker's 610 million shares are worth about $1.7 billion and it owes bondholders about $27 billion.

[ZL-1]

Pay off is a huge overstatement, swap is more like it. If GM turns around maybe some dividends (as well as some capital gains if they sell the shares at a gain) will end up on current bondholders' pockets.

Edited May 6, 2009 by ZL-1

[Teh Ricer Civic!]

There are currently 610,500,000 shares outstanding. Those are trading currently at $1.66. The stock will continue to plummet until they issue these shares.

Current market cap is 1 billion. So 1 billion / 60.6105 billion shares = $0.0165

Thats right, GM will have to issue these shares at less than 1.65 cents! This stock issue will raise around $1 billion for the automaker and will make the stock WORTHLESS if they issue all the shares.

GM will have to be VERY careful as to who they sell these to, because at this point it would be extremely easy for say Kirk Keorkian to buy all $1 billion of these shares and thus have a 98.99% ownership in the company.

So in other words, unless GM can magically convince people that they should pay more for this stock issue, this would be pointless and EXTREMELY dangerous.

Edited May 6, 2009 by Teh Ricer Civic!

[Drew Dowdell]

There are currently 610,500,000 shares outstanding. Those are trading currently at $1.66. The stock will continue to plummet until they issue these shares.

uhm

Reverse Stock Splits

A reverse stock split reduces the number of shares and increases the share price proportionately. For example, if you own 10,000 shares of a company and it declares a one for ten reverse split, you will own a total of 1,000 shares after the split. A reverse stock split has no affect on the value of what shareholders own. Companies often split their stock when they believe the price of their stock is too low to attract investors to buy their stock. Some reverse stock splits cause small shareholders to be "cashed out" so that they no longer own the company’s shares.

[Teh Ricer Civic!]

Yes Olds, i am fully aware of what a reverse stock split is. I am saying the stock price will continue to plummet to around $0.0165 because that will be roughly the value of the stock if they do in fact issue all 60 billion shares (GM market cap has been hovering around 1 billion for a while). Theoretically according to efficienct market theories GM stock should already be worth nothing after this announcement, but i guess things take a bit longer to happen in the real world.

The Reverse stock split is true if, and only if, existing GM shareholders are allowed to buy a proportional amount of this new issue so they can maintain their stake. OTHERWISE it will in fact wipe out their shareholding power.

Now if GM was issuing a 100:1 stock split then yes, it would still make the stock worthless, however proportionally everyone would own the same amount. But this is a new STOCK ISSUE, which is different. It will wipe out exiting shareholders unless they can buy proportional amounts in this new stock as i have said.

Although after re-reading it, since it seems they want the US government to own it, they may pay some ridiculous premium for the company because that is what governments like to do. The US government would then have majority ownership in GM... after the 1:100 reverse stock split is complete, all preexisting shareholders would be down to only about 1% of their previous holdings (just as they will be down to a 1% holding without the reverse stock split).

In other words, if you decide you would like to buy some shares in GM after this... make sure you purchase in increments of 100 shares, because otherwise after the reverse stock split you will have NOTHING... price should be equal roughly to what it is now per 100 shares since this is essentially 100x the current amount of shares outstanding.

Edited May 6, 2009 by Teh Ricer Civic!

[Drew Dowdell]

It will wipe out existing shareholders, not new shareholders.

And no, they won't issue it at 1.65 cents... that doesn't make any sense to do. They're trying to raise 60 billion in cash. They'll probably price it at $1.00 a share.

[Daryl Z71]

[source: Left Lane News]

GM to Issue Additional Shares to Pay Off Debt

A filing with United States securities regulators has revealed that General Motors will issue up to 60 billion additional shares in an attempt to pay of government, bondholder and union debts. The plans would essentially wipe out the holdings of its remaining shareholders - and since the United States government will become the majority shareholder, only the Treasury's approval would be necessary.

I think this will be a mistake. I wish they would just file for bankruptcy already!

[Teh Ricer Civic!]

It will wipe out existing shareholders, not new shareholders.

And no, they won't issue it at 1.65 cents... that doesn't make any sense to do. They're trying to raise 60 billion in cash. They'll probably price it at $1.00 a share.

I know, i am simply saying that there will likely be very few, if any, private sector areas that would even bother paying $1 per share when the company quite simply is not valued at that much at this time.

To raise 60 billion in cash is trying to raise 60x the current market cap of the company!

So unless the government is buying all the shares, i don't know who in their right mind would... i certainly would not.

[Drew Dowdell]

This is one of those rare cases where the market cap is more a reflection of market sentiment than market value.

[Z-06]

This is one of those rare cases where the market cap is more a reflection of market sentiment than market value.

I agree

[CaddyXLR-V]

I disagree. The company isn't worth more, because there is a big chance the shares will be worthless because they can't pay their debt, and will have to file bankruptcy. Those shares will be cancelled, or diluted, when the govt, union, and bondholders get their share. Would you buy GM for $10 billion or more right now, knowing you may have to file bankruptcy in a month, and you will come out owning only 1% of the company?

[Drew Dowdell]

I disagree. The company isn't worth more, because there is a big chance the shares will be worthless because they can't pay their debt, and will have to file bankruptcy. Those shares will be cancelled, or diluted, when the govt, union, and bondholders get their share. Would you buy GM for $10 billion or more right now, knowing you may have to file bankruptcy in a month, and you will come out owning only 1% of the company?

If that were the actual scenario at play, no. But that isn't what's happening.

[CaddyXLR-V]

If that were the actual scenario at play, no. But that isn't what's happening.

GM would have already been bankrupt if not for govt loans. GM is not worth much at all right now.

What do you think GM is worth? $50 billion? Will GM even make a profit within the next ten years, or will some investor(govt) need to keep pumping money in to keep it going? The market value is what the company is worth, when you take the risks GM faces over the next few months into account. Where is Kirk now? He could buy the company for less than $5 billion. Why doesn't he want it? I think the reason is because it's not even worth that, given how much money he would need to put into it to prop it back up.

[Drew Dowdell]

This stock issue is to pay off debt. It will ease the liabilities side of the balance sheet.

[Teh Ricer Civic!]

This stock issue is to pay off debt. It will ease the liabilities side of the balance sheet.

...yeah... the company still isn't worth very much.

Recapitalizing with equity actually DECREASES the firms value because there are no tax benefits to equity.

Weird huh? Now i am not saying that it is not a good thing to get debt off your balance sheet, because i certainly am not! I hate debt. BUT, simple market forces dictate that there is an "optimal"-ish level of debt to be had. If you have too much you go bankrupt, too little and your not recognizing your full potential.

Now, IF GM was truly undervalued, there would be several firms who would be looking to buy up GM recognizing that a tidy profit could be made by restructuring GM. However that has not happened, so obviously GM has more pressing issues at hand that has driven its market value very low.

Finance is a very weird and complicated beast that only makes sense if you think about it for way to damn long.

Edited May 6, 2009 by Teh Ricer Civic!

[Camino LS6]

I can make no sense of this whatsoever.

I barely even have an impression of what it means.

[deftonesfan867]

I can make no sense of this whatsoever.

I barely even have an impression of what it means.

You're not alone.

[Teh Ricer Civic!]

Its simple finance. Just grab a finance book and read up... or read it on the internetz.

Finance is always a good thing to know, its actually useful in routine stuff like looking for an auto loan etc etc. The more technical stuff is dry and boring, but the basic stuff is interesting to learn about, and with the basic stuff you can at least have an idea of the more complex stuff.

[Camino LS6]

Maybe, but to my untrained eye, this looks like a cousin to fraud.

[CaddyXLR-V]

This stock issue is to pay off debt. It will ease the liabilities side of the balance sheet.

Let's say GM does raise 60 billion from the stock issuing, which is optimistic, unless the govt is putting up most of it. 27 billion goes to paying off bondholders, 15.4 billion is still owed to the govt, and how much is owed to the unions, 22 billion? Even if only the bondholders and union are paid now, GM will only have 11 billion in cash. That will probably be the bare minimum amount GM needs just to keep running, and there's no telling how long GM will still be burning through cash, or when GM will first turn a profit. GM will lose marketshare with the closure of brands, and will gain competitives with the sale of other brands, in an already saturated market. Will GM still be worth the 60 billion their shares were bought for after all that?

[Teh Ricer Civic!]

Maybe, but to my untrained eye, this looks like a cousin to fraud.

Naw, this is not really a practice that is looked upon highly, however when a company incorporates, it has the right to issue some number of shares (it can always petition for more), and it can issue them whenever it wants. It USUALLY has some form of anti-dilution clause in there somewhere for existing shareholders, however if they are issuing these shares greatly above current share prices, i cannot honestly see anyone taking them up on this offer.

So in that regard, it is a suspect business practice, but certainly not fraud.

[mustang84]

I'm glad I sold my GM shares a couple weeks ago. They were only worth 20% of what I originally paid for them, but at least I got out before being wiped out. I just hope Ford doesn't have any plans to do a reverse split.

[gm4life]

I'm glad I sold my GM shares a couple weeks ago. They were only worth 20% of what I originally paid for them, but at least I got out before being wiped out. I just hope Ford doesn't have any plans to do a reverse split.

Glad you got out too. I hope this whats best for GM and I am really confused and getting lost in this, and I am educated person. (Well some would argue that...) Anyways so in the simplest terms does this mean the US and UAW own more of GM, than share-holders etc?

[GXT]

GM would have already been bankrupt if not for govt loans. GM is not worth much at all right now.

What do you think GM is worth? $50 billion? Will GM even make a profit within the next ten years, or will some investor(govt) need to keep pumping money in to keep it going? The market value is what the company is worth, when you take the risks GM faces over the next few months into account. Where is Kirk now? He could buy the company for less than $5 billion. Why doesn't he want it? I think the reason is because it's not even worth that, given how much money he would need to put into it to prop it back up.

As of December 31, 2008 GM was worth NEGATIVE 86 Billion. Q1 2009 earnings come out tomorrow. They should be worth much less than that.

No one wants to buy GM because even if the government paid YOU 50 Billion to take GM it still would be a bad deal.

[Teh Ricer Civic!]

I'm glad I sold my GM shares a couple weeks ago. They were only worth 20% of what I originally paid for them, but at least I got out before being wiped out. I just hope Ford doesn't have any plans to do a reverse split.

You realize that you would lose like NOTHING in a reverse split right? Ill do a little Finance 101 to clear up some misconceptions about stock splits.

IN a 2:1 reverse split (which i really doubt Ford would do, they seem to like keeping their shares priced low). All that means is that for every 2 stocks you own, you receive 1 stock back. In the end your ownership & value of your 1 share is the same as the value of your 2 shares, as is your ownership.

Look at it this way. Lets say Fords market capitalization is $1000. Ford has 1000 shares outstanding. Each share is therefore worth $1. YOU own 50 shares of Ford stock worth $50 and own 5% of the company. Now lets say Ford wants to make their stock look "better" so they issue a 2:1 reverse stock split. As i stated earlier, this means that you will trade 2 shares of your Ford stock in exchange for 1 share of Ford stock, which sounds bad right? But it is not.

Now after this reverse stock split, Fords market capitalization is still $1000. Ford now has 500 shares outstanding (1000/2). Therefore each Ford share is worth $2. YOU now own 25 shares of Ford stock still worth $50 and you still own 5% of the company.

Now lets assume Ford decided that $1/share was too much and they do the opposite, a 1:2 stock split. That means that for everyone one share of Ford stock you own, you will receive 2 shares in return. Now ford still has a market cap of $1000 and now has 2000 shares outstanding (1000x2), and thus each share is worth $0.50... YOU now own 100 shares of Ford company worth $50 (100x.50) and you still own 5% of the company (100/2000).

The difference between that and what GM is doing, is that GM is going to issue a TON of new shares to the point that old shareholders COMBINED would control all of 1% of the company. THAT is what is wiping out their stock ownership, not the reverse stock split afterward... although at 100:1, it may get rid of the people that only had a few shares... i am not sure how they would deal with someone who only owned say 50 shares of it.

So in conclusion, you can see that stock splits and reverse stock splits are nothing to be afraid of. I am sorry i made them sound bad earlier, i am not really sure what i was thinking, but i was more concerned with the massive dilution that existing shareholders are going to experience through this.

Edited May 7, 2009 by Teh Ricer Civic!