After becoming a financial mess and being taken over by the government, General Motors (NYSE: GM ) underwent a bankruptcy process that wiped out shareholders and forced massive haircuts on bondholders. The restructuring has enabled GM to become profitable again, however, and the government has been steadily selling its stake. Last year, American International Group (NYSE: AIG ) was in a similar situation as Uncle Sam wound down its ownership of the insurance group. Can any comparison be made between GM and AIG? Let's take a look.
Both GM and AIG were in a situation where they needed government support, but their respective industries also had members that did not require such assistance.
In insurance, Prudential and MetLife avoided AIG's situation and even bought assets that AIG was selling. While GM and Chrysler both needed government help, Ford (NYSE: F ) did not need help by anywhere near the same extent. Ford did receive $5.9 billion in Department of Energy loans from the same program that helped Tesla Motors, and these funds did help the automaker through tough times. Government involvement in Ford was less hands-on, though, and has allowed Ford to build the image of being the American automaker that didn't take bailout funds.
Majority stake and share sale
As part of the bailouts, the government took majority stakes in both GM and AIG. This allowed the government to exercise control over the restructuring processes for the companies. The government did not want to be in the insurance or automotive businesses, however, and took the opportunity to reduce its ownership once each company was on stable ground again. In AIG's case, the government was able to make over $20 billion in profit. Unfortunately, the final numbers from the GM sale are expected to make the GM bailout a net loss for Uncle Sam.
Share price action
During the government's sale of AIG, publicly traded shares remained stuck in the high-$20 and low-$30 ranges. The fact that the price remained steady while millions of new shares were entering the market meant that there had to be significant buying pressure as well. The buying pressure was seen in fuller force after the government share sale was completed and shares moved into the mid-$40 range.
GM shares have rallied strongly despite the sale of the government stake. Shares moved from the $20 range into the upper-$30 range before sliding back to near $35 where they are today. With the share price increasing even as new shares enter the market, GM appears to have meaningful buying pressure behind it. If this buying continues after the government sale is finished, GM shares could see a pop similar to that of AIG as buying continues but supply stays the same.
Investors looking to gain leverage on GM or AIG shares also have long-term warrants to consider. AIG warrants expire on Jan. 19, 2021, and carry a strike price of $45 per share. GM actually has three classes of warrants:
|GM Class A||$10.00||Jul. 10, 2016|
|GM Class B||$18.33||Jul. 10, 2019|
|GM Class C||$42.31||Dec. 31, 2015|
The warrants do carry additional risk, but they also offer more bullish investors greater exposure to these companies.
The bottom line
AIG and GM both share a common situation where the government sold or is selling its majority stake while the market keeps the publicly traded shares from falling. This signals buying pressure in the midst of the government share sale. AIG shares moved sharply higher after the government sale was completed, and GM shares may do the same following the completion of its government sale. Investors looking to capture this pop could gradually accumulate shares. Those looking for greater exposure may want to take a look at the warrants as well.