Can GM repay our $50 billion loan?
Jun 30th 2009 9:30AM
Updated Dec 4th 2009 2:55PM
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.