The rout at AIG
A multibillion-dollar bailout put AIG in the headlines two years ago. Now AIG is paying off its debts to U.S. federal agencies, converting the preferred shareholding of the U.S. Treasury into common stock, and preparing to "re-IPO" that 92% stake to the investing public. Investors fear that this will spark a wave of dilution of current common stockholders, and in all likelihood, a wave of selling as Uncle Sam liquidates his position in the stock. By selling, the government probably aims to recoup its initial investment, if not make a small profit.
In essence, this seems similar to what happened with the General Motors
I think they're right to do so.
The complex, made simple
When Goldman Sachs
When AIG's bad bets came home to roost, the government stepped in with multiple rounds of capital injections to avert bankruptcy. Taxpayers like you ultimately loaned AIG $182 billion.
Ever since then, AIG has been moving heaven and earth to repay its creditors. It sold Alico to MetLife
According to Treasury Secretary Geithner, AIG's good for it: "Treasury remains optimistic that taxpayers will get back every dollar of their investment in AIG." With its preferred AIG shares now converted, Treasury has 1.655 billion common shares to work with. The plan at this point is to hold a "re-IPO" in May, raise maybe $23 billion initially, then slowly dole out the rest of Treasury's AIG shares over several months. If Treasury can average $41 per share over time, taxpayers will at least break even on the "investment."
Will it work?
It depends. Bouncing ever so slightly after yesterday's fall, AIG shares may have found a "bottom" today at $43 and change -- just north of what taxpayers require to break even. According to the most recent information we've seen, there should be about 1.9 billion AIG shares floating around out there right now.
(If Treasury's 92% stake in the company wrepresented 1.655 billion shares as of Wednesday, it follows that AIG must have had 1.8 billion shares outstanding. Add another 75 million shares to the diluted count, in consequence of the warrants being stripped Thursday, and you're within spitting distance of 1.9 billion).
Now take that share count, multiply by the current share price, and you get a company valued at roughly $83 billion.
Is AIG worth it?
Yahoo! Finance tells us AIG has a "$30 billion" market cap. But that's based on last-reported numbers, and depressed by the presence of preferred shares (a form of debt) that have now been converted to common stock as the "debt" magically vanishes. The math on this stock is truly a dog's dinner. Still, once the government's shares get figured into the equation, my guess is that AIG will ultimately be assigned the actual value of the shares that make it up -- $83 billion or thereabouts.
Is that price cheap enough to allow those who buy the shares when AIG re-IPOs have a decent chance of making a profit on their investment? I'm not so sure.
As I argued back in May, the company that goes "re-public" in May is not your father's AIG. It's been forced to liquidate a lot of its most profitable businesses to raise cash and repay creditors. As a result, AIG now has far fewer businesses with which to earn profits. It's unprofitable based on reported data for the past 12 months, and while many analysts believe the company eventually turned a profit in 2010 (once last quarter's numbers are reported), they also expect to see that profit drop steeply in 2011, before it starts to turn around again.
Ignore the noise
Even as bankers like Morgan Stanley, JPMorgan, and the like angle for a piece of the IPO, most analysts on Wall Street remain decidedly dubious about AIG's prospects. AIG currently garners four "hold" ratings and two "underperforms." Not a "buy" in sight.
I expect these published opinions to change in a hurry, just as soon as the bankers making the ratings get a piece of the IPO action. Personally, I intend to tune out the coming wave of happy-talk and focus on the numbers. If AIG proves it can turn a profit, I'll give the stock a fair shake.
But would I buy the stock on a wish, a prayer, and some conflicted analyst's say-so? Not a chance.