Can GM repay our $50 billion loan?
Filed under: Company News
On June 2, a day after it filed for bankruptcy, I estimated that the new General Motors would have to reach a value 20 percent above its all time high in order to repay the $50 billion government loan it received to keep it from having to liquidate. A month later, The Washington Post is out with a similar analysis, which agrees almost to the penny with my estimate. My conclusion then was that reaching this value is unlikely and that our money is mostly gone.
I concluded then that the new GM would need to be worth $68.7 billion in order to pay back the $50 billion loan the U.S. will make to GM. How so? Since $8.8 billion of the $50 billion will remain in the form of loans, the U.S. will convert $41.2 billion worth into its 60 percent equity stake.
This means that in order to break even on that $41.2 billion equity portion of our investment -- this does not even take into account getting a profit for taxpayers after taking on the risk -- the new GM would need to have a market capitalization of $68.7 billion.
The Post noted that at its 2000 peak, GM was worth $56 billion -- but I calculated a higher figure of $57.2 billion on April 28, 2000. Meanwhile, I question how GM could reach such an enormous market capitalization in the next few years.
Evercore Partners, a bank that the U.S. hired to help with the restructuring estimated that by 2012 the equity value of GM will range between $59 billion to $77 billion. I am not sure how Evercore arrived at those numbers but with the new GM being smaller -- taking out Hummer, Saab, Saturn, and Pontiac -- GM's current 19.2 percent market share will tumble to 16.4 percent.
This decline in market share will of course lead to lower revenue and profit. So unless the new GM can somehow reverse a 40 year decline in its competitive position; boost its revenues due to overall demand growth and greater share; and cut its costs to expand profits -- those projections look like a pipe dream to me.
If Evercore's numbers are overly optimistic it would not be the first time that numbers were tortured to support the outcome that management was seeking. Meanwhile, feel free to post questions for GM's top management because I am trying to schedule an interview and welcome your thoughts.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 4)
6-30-2009 @ 3:05PM
LARRY said...
GM WILL NOT REPAY ANY LOAN - THE TAXPAYERS THRU OBAMA'S INEPTNESS WILL NOT GET A CENT--THE POLITICAL HACKS OBAMA HAS RUNNING GM WILL PUT IT OUT OF BUSINESS IN ONE YR.
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6-30-2009 @ 12:17PM
JSull said...
No. GM will last somewhat longer than a year because the UAW has strong support from Congress AND the White House who will continue to pump money into a losing cause. Therefore its life span is that of the Administration. Then, it's over. The union, the Treasury Dept and the EPA will be the end of mighty GM. Sob.
6-30-2009 @ 12:51PM
CHIP1DOGUSA said...
LARRY IT'S CALLED FUZZY MATH . THE NEW OBAMA DOLLAR
6-30-2009 @ 12:06PM
Will said...
They could if their dealers would get their crap together...the new camaro is out and there is a reasonably high demand and the dealers are trying to sell the car anywhere from 5k-10k more than the MSRP which is pissing people off and they are walking out their doors. They purposely only order a couple more than whats been purchased already to keep supply low so that they are able to say "they are selling right when they come in". Good Luck GM ....with dealers like these its no wonder you'll be gone in a few years....UNLESS THE GOV'T GIVES YOU ANOTHER BAILOUT OF OUR MONEY....
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6-30-2009 @ 3:25PM
Larry 2 said...
Your accusation that GM"s problems are accountable to their dealers shows how grossly misinformed you are.
Having worked at a reputable GM dealer for over 34 years,
and having had to deal with the arrogance of Corporate
GM management for those years, I find your statements
offensive. GM management acts like they still have 50%
of the market. GM corporate got themselves into this mess,
and it is only going to get worse. I doubt they will survive.
To stop them from becoming Obama motors, I suggest
BO fire all members of the board, and all Management,
and get a contingent of Japanese to oversee and run GM.
Apparently they know what and how to build autos that
people want to buy.
F.Y.I. Regarding the Camaro, GM's product allocation
process does not allow a dealer to order as many Camaros
as he would like. A dealer can only order as many as GM
will give them. In our instance, every Camaro we have been
allocated has been sold, and for window sticker. When GM
has come out with high demand, low availibility product, we
have never charged over window sticker. Once these Camaros start building up on dealer lots is when you will see discounts off sticker and very likely, rebates. There is a
price to be paid if you want to be "the first on your block".
I am curious to know how you came by your attitude. Did
you approach a dealer and offer to buy one of his Camaros
for invoice? Or worse, under invoice? If so, I'm sure you
were asked to leave the way you came in.
It seems you don't have a clue how the Law of Supply
and Demand works.
6-30-2009 @ 5:24PM
Jay said...
@Larry 2. perhaps the dealer you work for is quite reputable, however, many are not. i don't claim to know the exact workings of a car dealership but i can comment from the customer's point of view. i found it amazing how when the new challenger came out, chrysler, yes i know, the lowest sucker sticker i could find was $18k over sticker. since the beginning of the year the sucker sticker went away since no one was buying from a potentially bankrupted automaker. same thing for the camaro. i went to several chevy dealers and all were trying to gouge at least $10k over sticker. gto, g8 gt,... anything new and hot many dealers will try to stick it to ya. sure i understand supply and demand-i will just wait a year and get one at a nice discount. there is a reason why most people abhor car shopping, think about it!
6-30-2009 @ 6:27PM
bacon said...
Will, I am a gm dealer and yu have no idea what you are talking about. Right now the Camaro is a supply and demand car. You have a choice to wait or pay up. It is a free country. P.S. I don't hear the Lexus customers complain when they pay the dealer $6000 in gross profit per car. Just a thought?!
6-30-2009 @ 7:38PM
Rick said...
Its not the dealers although they where and have always bin part of the problem its everything, car styles, engineering , poor manufacturing, high labor cost by the union.
All of the above and more take it from a person who owned GM cars and trucks most of his life but will never buy anymore government motors cars.
6-30-2009 @ 12:49PM
dave said...
As I and Others have said in the past. GM should have been left to fail and not bailed out. Its not over yet. GM will need more Cash and will never be profitable in todays market. Another of obamas bad decisions.
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6-30-2009 @ 4:54PM
Dal said...
GM management along with the management of steel companies and other manufacturing companies started in the late 1960's to give the store away to the unions and we are now seeing the results. Wewill be paying tax money to the UAW as long as the Dumocrats elect Democrats to run ouu country.
6-30-2009 @ 1:26PM
R.G. Dumont said...
REAL AMERICANS DRIVE REAL AMERICAN CARS...If we purchased domestic cars our economy wouldn't be in the mess were in. I hope all you TRAITORS that bought hondas,toyotas,hundais,realize what you've done to not only the auto industry but , the steel,rubber,wire,glass chemical,paint industries etc..
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6-30-2009 @ 11:21PM
Geordi said...
REAL Americans use their freedom to buy what suits their needs the best. That's the freedom of the marketplace. Consumers owe NOTHING to auto manufacturers who design and build garbage to exploit gullible customers, then make a profit on the loans these misguided saps take out to buy that garbage. People buy foreign cars for a reason, something that GM and Chrysler never figured out. Ford has only begun to figure it out in the last 10 years. If you put out a good product at a low cost, people will buy it, and you won't need to try to force them to with a stupid and ineffective guilt trip.
7-05-2009 @ 11:18AM
vinny said...
Toyota and Honda both produce cars here in the U.S. so when you buy those cars you are still helping supply americans with jobs. lots of gms are made in Canada and Australia. other countries started producing steel for much cheaper than we do here a long time ago and so companies stoped buying it from here and thats what killed the us steal industry not people buying hondas. overall your argument is aweful
6-30-2009 @ 1:22PM
docksidelpoa said...
You are all right, but I really think that everyone is missing the even bigger picture. Our economy is in a mess and we are approching dire straights. But you can't tell people that because that would induce panic among the people. Our great nation is ill, and the doctor is out. All of these bailouts and loans coupled with failing banks, insurers and swindlers are indicators people. Its summer people sure things are going to look a little brighter, but winter is in the shadows. Lets not kid ourselves, we can't keep hoping it will get better, we have to make sure it does.
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6-30-2009 @ 1:27PM
Dave said...
My questions for management:
1. How do the taxpayers get a 60% share when putting up $40MM over the value of the "as is" company, the secured creditors get around 10%, while the union gets 18%. What was the union's contribution to value and how do they get a preference over the secured creditors and the taxpayers?
2. Assuming GM can return to profitability, at a 16% market share assuming no increase or decrease in the number of units sold per year, what would be the required net margin % required to provide the $67B market capitalization at a 13 PE ratio? I expect they will need to be in a 40% net profit margin to get to this market cap which no car maker has achieved.....
When the government spends our money they never worry about if it makes sense, it seems the standard is if it buys votes. In this case the Democratic party, main concern is to keep the Union voting block appeased to maintain power.
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6-30-2009 @ 1:35PM
Suhas Mehta said...
US govt. is making a sub-prime style investment of our tax money into GM. Another bubble in the making to burst in early next decade.
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7-01-2009 @ 12:08AM
roger said...
General Motors will no longer exist ten years from now - maybe even five years from now. Thanks to the UAW for being greedy and killing the goose that lays the golden eggs.
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6-30-2009 @ 2:09PM
Alvenchipmunk said...
"Never ride a pig to slaughter", they should have been left to struggle unless the met the strongest of demands. They should have moved the plants south along time ago and dissolved the unions. The Chicago president who can chew gum and walk at the same time surely could of figured this out. He said he was different and was going to change Washington looks like he was the one changed.
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6-30-2009 @ 2:12PM
Heather said...
I dont know but where we live there are not any camaro's to buy they are all sold. We lucked out and found an order that fell through so we got a SS and yes it was $5k over sticker so $50700 but its worth every penny. GM rocks and Obama can kiss my SS
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6-30-2009 @ 2:33PM
Randy said...
The morons who drive jap and korean cars don't give a damn about their own people. They would rather see another country do better than their own. How sad!
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