Tony Soprano must be rolling over in his grave.
Two years ago, deadbeat debtor General Motors told the government it needed billions of dollars in bailouts or it would go bankrupt. It got the money -- then went bankrupt anyway. This alone would've earned it a kneecapping from the Soprano crew.
Fast-forward two years and GM CEO Ed Whitacre emerged Wednesday from a meeting with Treasury Secretary Timothy Geithner and Speaker of the House Nancy Pelosi to proclaim that, just like fellow TARP recipients Bank of America, Citigroup, and Wells Fargo, GM had paid its tab: $7 billion in government loans [claps hands and makes whisking motion] gone!
Which is great, Ed, but -- wait a minute, getting out my calculator here -- didn't we give you guys $50 billion?
60% of what is what?
Actually, we did. But don't worry. According to Whitacre, GM's good for the other $43 billion. Says he: "I think the stock could be worth a lot and the taxpayers could get all their money."
You see, when GM filed for bankruptcy, the U.S. government took a 60% stake in the company in lieu of repayment. (Which is why GM's corporate structure is described by some -- literally and accurately -- as a subsidiary of the Department of Treasury.) Whitacre says he has every intention of making good on that investment and getting out of the "Government Motors" business. But how likely is it that we'll succeed in converting our national 60% shareholding in GM into $43 billion, cash money?
Earlier this month, GM filed its first complete financial report since emerging from bankruptcy protection. In it, we see that GM booked $104.6 billion in revenue last year and rang up about $21 billion in operating losses. By way of comparison, Ford (NYSE: F ) collected $118.3 billion in revenue last year, with a much smaller operating loss of only $611 million. Yet despite boasting more revenue and smaller losses than GM, Ford's market cap stands at just $48 billion.
Let's be clear: To make the government's 60% stake in GM worth $43 billion, GM as a whole would require a market cap of approximately $71.7 billion. In other words, GM needs to IPO at a price 50% higher than Ford currently carries. This, despite the fact that GM brought in 12% less revenue than Ford did, and lost more money.
Doesn't seem likely.
A more likely scenario
Continuing with the comparisons, Toyota (NYSE: TM ) made $184.8 billion in sales last year, and carries a $122 billion market cap. Honda's (NYSE: HMC ) numbers are $86.8 billion (sales) and $63 billion (market cap). Nissan (Nasdaq: NSANY ) has $76.6 billion (sales) and $34.3 billion (market cap).
GM's about midway between Ford and Honda in terms of revenue. So let's assume investors grant a revitalized GM a price-to-sales ratio somewhere between those of Ford and Honda. Say, a nice, round 0.5 times. This suggests that at $104.6 billion in sales, a newly public GM should fetch roughly $52 billion in market cap, making our national stake in the company worth $31 billion. That's a far cry from $43 billion.
Will our stake ever grow back to the $43 billion we initially sunk into the company? Yes. Simple annual inflation of 3% should turn our $31 billion take into $43 billion in just 11 years. (Of course, those dollars won't be worth as much as they are today.)
A modest, Foolish solution
And so the U.S. government will soon face a choice. GM says it could sell shares to the public as early as the end of this year. Assuming rational investors apply a rational valuation to the stock, the government will have the option of sitting on its GM stake for perhaps a decade (or, more pertinently, three election cycles), at which point it can proudly proclaim its brilliance at having "invested" in GM way back when, and declare the debt to the U.S. taxpayer paid in full.
The government can do that … if it's about as dumb as a doorstop. As fiduciary for the U.S. taxpayer, I'd hope our elected representatives would make better use of our money, or allow us to make better use of our money.
To my Foolish eye, the decision here is patently clear: Just as soon as GM comes public, the government should sell its shares to whomever it can find (China? You hearing me?), take the money, and return it to the taxpayers who fronted it the cash.
Trust us, Tim Geithner. We'll do a better job investing the money than you did.
Got a different take on the situation? Tell us about it in the comments section below.