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“Government Motors” No More: GM Surges as Feds Exit

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Shares of General Motors (NYSE: GM  ) hit a 52-week high on Wednesday, surging as much as 17% higher than Tuesday's close price, on news that the U.S. government finally would cease being the company's largest stockholder. Investors are piling into the stock after the company announced that it would buy 200 million of the Treasury Department's 500 million shares. Concurrently, the White House announced that it would sell all of its remaining 300 million shares on the open market over the next 12–15 months, marking a complete divestment.

The initial share repurchase will reduce the government's ownership stake from 26% to 19%. This $5.5 million repurchase will be financed out of GM's $38 billion in cash and equivalents on the balance sheet. GM will buy the shares for $27.50, an 8% premium to Tuesday's close, but still sufficiently low that Treasury would need to sell its remaining shares for around $70 each in order to recoup its investment. Taxpayers will probably lose on the deal, but investors are pleased.

There are a few reasons for investors to be enthusiastic. Not to be overlooked is the fact that GM's share repurchase will reduce the number of shares outstanding by 11%, boosting earnings per share for remaining shareholders. With shares of General Motors looking undervalued, this looks to be a smart purchase.

More notable, however, are the symbolic and practical effects of the move. General Motors, along with Chrysler, were two of the highest-profile victims of the recession. They were bailed out and taken through an expedited bankruptcy and restructuring in 2009. In General Motors' case, the government received 912 million shares in return for about $50 billion in public funds. In General Motors' 2010 IPO, Treasury sold 412 million of its shares for $33 each. That still left the department as the largest single owner.

Other big and unusual equity holders include the Canadian federal government, the provincial government of Ontario, and the United Auto Workers through an employee benefits association. All together, these public sector and labor owners control about 51% of the company. That's been a headache for GM's management and shareholders.

GM believes government ownership has tarnished its brand. After the bailout, GM was popularly said to now stand for "Government Motors." More than just rhetoric, GM believes this attitude steers potential customers away from its vehicles. CFO Dan Ammann claimed Wednesday that "[General Motors has] some market research that has suggested the government involvement in the business has some impact on sales, therefore as we move past this stage we expect that to be a benefit."

The specter of the government selling shares en masse, flooding the market and driving share prices down, has also been hanging over the stock. The restructured GM is highly profitable, even accounting for the hemorrhaging losses in Europe, yet before Wednesday's price run-up the stock was valued at a mere nine times earnings. That seems low compared to foreign peers like Toyota Motor (NYSE: TM  ) and Honda Motors (NYSE: HMC  ) , both valued at nearly 16 times earnings, or Fiat (NASDAQOTH: FIATY  ) at 14 times earnings. Removing the threat of a large government sale by actually selling the shares in what Treasury official Timothy Massad promised would be an orderly process, rather than a fire sale, might be the best catalyst for driving valuation multiples higher.

Government ownership also came with certain strings attached. Out of concerns over image, the government banned GM management from owning private jets, and required a certain percentage of vehicle parts to be produced within the U.S. by American labor. A jet is not critical to the company's success, and GM has announced that it is already well above the "made in America" threshold, and has no plans to reduce its American workforce, so the expiration of these rules should have little effect.

The government also put strict salary caps on upper management at GM. Executives believe this has harmed the company's ability to compete for top talent compared to the other two big Detroit carmakers. Ford (NYSE: F  ) never took bailout money, and therefore has been free to compensate employees however it sees fit. Perhaps relatedly, led by industry veteran Alan Mulally, Ford has been more nimble than GM in several respects, unveiling the companywide "One Ford" effort to streamline and simplify its products in order to cut costs and boost customer satisfaction.

Chrysler was originally under similar restrictions, but after being bought from the federal government by Italian carmaker Fiat in 2009, that company is effectively under the control of Fiat's talented boss Sergio Marchionne and his management team. A government exit for General Motors, allowing the company greater freedom to bring in top talent, may aid the company's efforts to streamline its operations along the lines that have been so successful at Ford.

The government exit may mark an end to an era of mismanagement and complacency. GM's turnaround, however, is still a work in progress. Investors around the world are wondering if GM has what it takes to reclaim its former glory. John Rosevear has put together a brand-new premium research report telling you what you need to know about GM and its turnaround. If you own or are thinking about owning GM, then you don't want to miss this report. Click here now to get started.

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