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Fool Blog: You Don't Seriously Still Own GM, Do You?

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My mind is utterly blown. After being told that their shares would be diluted to next-to-worthlessness, General Motors (NYSE: GM  ) shareholders proceeded to drive up GM's shares yesterday by over 20%. Sorry if this is harsh, but …

What freakin' planet are you people on?
Ahem. Look, I don't mean to dance on anyone's grave here. I love America, apple pie, and all that Norman Rockwell nonsense as much as the next guy.

Then again, I'm also a realist, and I can't fathom what would possess someone to own shares of this scrapheap. Let's consider the overwhelmingly likely outcomes for GM shareholders from this point forward:

  • Heads: GM stays alive, and you're diluted 100-times over via a new restructuring plan.
  • Tails: GM ends up filing for either Chapter 11 or (gulp) Chapter 7, and you lose all of your investment.

The bitter irony here is that, should this proposed exchange offer proceed (90% approval from GM bondholders is the big sticking point), GM would emerge a much leaner company, far better prepared to duel with cross-town rival Ford (NYSE: F  ) and more efficient Japanese rivals Toyota (NYSE: TM  ) , Nissan (Nasdaq: NSANY  ) , and Honda (NYSE: HMC  ) .

That's great, but keep some perspective: Current shareholders would own only 1% of the new-and-improved GM. The other 99% of GM's equity will be divvied up among the U.S. government, a trust for GM's employees, and bondholders. So, sure, GM might start cranking out something close to respectable earnings as early as 2011, but current shareholders' sliver of the pie would be close to zero. It's like you're trading in a rusted-out Bonneville in exchange for the right to share a new Caddy with 99 other people. That's news to celebrate?

GM's shares currently trade near $1.90, with about 610 million currently outstanding. That values GM's current equity at about $1.1 billion. But if this restructuring goes through, these shares will represent only 1% of GM’s total equity pie. Would you pay $1.1 billion dollars to own 1% of GM? Me neither. Color me skeptical, but that implies an incredibly rich valuation considering the still cut-throat nature of the auto biz and the fact that GM is dramatically slashing its production capacity.

But then, all of that assumes the bondholders swallow this bitter pill. There's a good chance they won't, in which case your shares probably will end up worth nothing. Literally.

My hunch is that GM's shares are in for a sharp correction once Mr. Market comes to his senses regarding the epic dilution we could witness. The shares look grossly overvalued here -- especially given the high likelihood of bankruptcy. Unless you've seen something I'm missing, or you're confident in an economic miracle bailing you out, there's absolutely no reason for you to own GM shares.

Think I'm wrong? Let's hear your argument in the comment box below. Fool on!

Senior Analyst Joe Magyer has no financial interest in any of the companies mentioned in this article. Nissan is a Global Gains recommendation. If you Google the words "disclosure policy," The Motley Fool's disclosure policy lists second on the results. Go ahead, try it. Told ya so.

Read/Post Comments (14) | Recommend This Article (58)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 28, 2009, at 3:41 PM, ikkyu2 wrote:

    I think there's probably some money to be made holding GM shares and lending them out to the shorts. Who knows who's on the other end of the short sale, though - that guy really is a patsy.

  • Report this Comment On April 28, 2009, at 4:19 PM, ScottInSeattle wrote:

    you fail to mention the 100:1 reverse split when all is said and done. that will bring the (something like) 68 billion valuation to 6.8 billion. still too much, but not like you were reporting. it.

    or, is the reverse split only on the bondholders? making the offer of 525 shares per $1000 of debt actually 5.25 shares...oh, and no fractions, so 5 shares per $1000...

    wow. that would mean, each share is worth $200! ha ha ha! GM and Gov and UAW are absolutely shafting the bondholders. people

  • Report this Comment On April 28, 2009, at 4:20 PM, BraveandBold wrote:

    I have a very small position (200 shares bought @ 1.75). I'm treating it like an option.

  • Report this Comment On April 28, 2009, at 4:23 PM, ScottInSeattle wrote:

    braveandbold, i think soon you will be treating it like a tax is inevitable that common gets wiped, either through bankruptcy or dilution and reverse split...

  • Report this Comment On April 28, 2009, at 4:55 PM, thetruthis wrote:

    Your dilution argument is wrong.

    GM doesn't give up shares and let existing shareholders' holding dilited for nothing. GM receive somthing and issue shares in return. The "something" increases its corporate value. Therefore, the value of my holdings won't change even thought I am holding a smaller percentage of the company, because of the increased company value.

    So, merely dilution should not have any impact on my holding value, it is something else.

    The problem with the dilution of this nature is that the goverment becomes a major shareholder and its investment goal is not the same as a regular investor's. The goverment, with its voting power, may come up with a Board that deviates the investment goal of the existing shareholders.

  • Report this Comment On April 28, 2009, at 5:14 PM, tantricavatar wrote:

    Joe,I definitely commend you for being a right sensible investor.You are probably correct on all fronts.

    However,do allow us SPECULATORS somegrounds for Speculating(underline Speculating).We do have several reasons.:

    The FIRST(and the weakest of the reasons):The potential(possible,probably not probable)of GM at least PARTIALLY straightening out its s***(which I believe it IS doing)and the stock returning to at least a shadow of its previous glorious heights with the dollar risk being that of a Call Option(as some people have written already).

    The SECOND:The technical sign that EVEN after the announcement(s)....Several,of it probably being forced to go into bankruptcy by June 1st,the Common stock (so far)holding above its 12 month lows even WITH the market fully aware that the Common stock goes before anyother creditors or the Bonds.

    The THIRD point has to do with the Bonds :Why would the Bondholders even CONSIDERS accepting Common Stock to give up on their Bonds if the Common stock is going to be worthless?

    A (small)Chance of GM making enough deals all around to stay out of Bankruptcy??Not an Idea which you can INVEST in but an Idea which I (and possibly a few other FOOLhardy people could chew on after putting on their thinking caps) tell me.

  • Report this Comment On April 28, 2009, at 6:30 PM, TMFMmbop wrote:

    A debt-free GM could conceivably be worth a 1x sales multiple, implying a $140b valuation, though they'd have to clean up last year's $13b operating loss to maintain such a valuation. Who knows though? Government intervention is a total wildcard.

  • Report this Comment On April 29, 2009, at 10:36 AM, BraveandBold wrote:

    If I get back to $2 on my $1.75 investment I still beat my omeny market fund which is all I that I aim to do these days.

  • Report this Comment On April 29, 2009, at 3:43 PM, chopchop0 wrote:

    I was thinking the exact same thing....

    Maybe people are thinking that government will always pump GM up with something? If it's not outright $$$, then perhaps favoritism through policy writing

  • Report this Comment On April 29, 2009, at 4:28 PM, KKnese wrote:

    A lot of the stockholders are GM employees who are relatively unsophisticated (and un-foolish) about the stock market. Years ago, management said something like "look we're giving you a great deal on company stock for your loyalty and hard work". The employees bought in and forgot about it. Either that or they're in denial.

  • Report this Comment On May 03, 2009, at 3:29 AM, EarthCreature wrote:

    A - Saudi Arabia ventures to centre of desert to build two massive oil refineries so large Dubai was a spinoff (heard of Dubai?) - point being your puny planet is not our of oil and the price will stabilize immediately.

    B - US and EU deploy simutaneous $1 Trillion stimulous packages - if people get jobs and need a car - are encouraged to buy US made models.

    C - The survival of your planet depends on the Chevy Volt - government cannot let this company fail.

    D - Need funds to get back to home planet.

    E - Beats the hell out of 3 card poker for 9.23 earth months.

  • Report this Comment On May 28, 2009, at 6:02 PM, GMskeptic wrote:

    For all you people that own GM shares I truely feel bad for you. The shares that you now own are going to be worthless because they are going to be connected to the OLD GM which is going to be liquidated. So your shares will be worth nothing. On a side note I think that despite how GM execs have messed up this company, the goal from the beginning for Obama has been to get GM into BK. He is pushing every button possible to rush everything through. That way he can be looked upon as the President that cleaned up America, however every American and their children and their grandchildren (if we survive this) is going to pay for it.

  • Report this Comment On May 28, 2009, at 9:53 PM, jesse2159 wrote:

    After the bankruptcy is completed, GM will need $50 billion in new capitol, (furnished by the government) to limp along for years, losing more market share on vehicles that are uninspiring, ugly and dull.

    Just let GM die a natural death. Unplug the life support, reel in the feeding tubes and call the undertaker.

  • Report this Comment On May 29, 2009, at 10:40 PM, boysmakegoodpets wrote:

    i'm with jesse2159.

    we don't have to strive to be a superpower in *everything.* the ability to recognize one's own shortcomings is a great strength. so let's just accept the fact that other people in other countries are better automakers than we are - *way* better - and just let GM take one last drive, straight down the tubes. it would feel wonderful to have that weight off our shoulders.

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