Is it time for the U.S. Treasury to dump its stake in General Motors (NYSE: GM)?
It is -- if you listen to former GM CEO Ed Whitacre. In an opinion article that appeared in Thursday's Wall Street Journal, Whitacre said that the time has come for the Treasury to "sell every last share that it owns of General Motors -- as quickly as possible."
Whitacre argued that the Treasury's ongoing ownership -- specifically, the conditions imposed by TARP, the Troubled Asset Relief Program, which funded the $50 billion bailout that led to the government's stake -- is hindering GM's recovery.
Is he right? And if he is, what are the implications for GM's other shareholders?
GM is done with the whole "Government Motors" thing
Whitacre's opinion piece is the latest salvo in an ongoing GM campaign to pressure the government into selling. The Wall Street Journal reported earlier this week that Whitacre's successor, current GM CEO Dan Akerson, has been pushing a plan in which GM would buy back some of Treasury's shares, while offering the remainder on the open market.
Why the rush? Several reasons. First, Akerson, and most everyone else at GM, is tired of being painted with the "Government Motors" brush. The lingering stigma of the bailout has made it harder for GM to tell the (increasingly good) story of its much-improved products and strong balance sheet. GM's turnaround may be lagging Ford's (NYSE: F), but it's on the right track -- but that story isn't getting told well, which has held back GM's U.S. sales as well as its stock price.
Second, TARP comes with some strict rules, like limits on executive compensation. Akerson has argued that those rules have made it harder for GM to attract top senior-level talent. According to the Journal, GM executives are also privately cranky about TARP-imposed limits on corporate jet use. (That might sound like rich-guy whining, but Akerson and his senior team members spend a lot of time going back and forth between Europe and China and Detroit. To the extent that corporate jets make sense for any company, they definitely make sense for a global behemoth like General Motors.)
That's why Akerson has been pushing the Feds to sell. But, so far, Treasury officials haven't been interested in GM's plan.
The Feds aren't (yet) willing to sell
Treasury has two main objections to selling. First, at current prices, the Feds would take a loss of roughly $15 billion on their $50 billion "investment" in the General. That would look bad. It would look especially bad -- here's the second objection -- coming just weeks before a hotly contested presidential election.
Clearly, nothing is going to happen before the election: GM's bailout is already too much of a political hot potato. But what about after? Republican nominee Mitt Romney has said that he would sell the government's remaining stake in GM shortly after taking office, even if that meant a loss for the Treasury. Assuming the sale was managed well, so as not to disrupt the market, it would be a win for Akerson. And it would probably be a win for GM's other shareholders too, at least in the long run.
But President Obama, who is leading in most polls at the moment, has been less clear about his plans for Treasury's stake. What's likely to happen to GM if he's reelected?
How this story is likely to end
It's in GM's interest to end this relationship as quickly as possible, but it's also in GM's interest to do it in a way that doesn't leave the public with the impression that taxpayers lost money on the deal.
Consider: GM has roughly $33 billion in cash on hand. Setting aside for the moment the possibility of a big pension liability at some point down the road, GM probably needs about $20 billion of that to ensure that it can continue to fund product development programs through a protracted economic downturn.
That leaves $13 billion to play with, give or take, which is close to the loss the Treasury Department would take on its "investment" if it sold all of its remaining GM stock today.
I won't be surprised if, sometime after the election, Akerson packages up an offer to Treasury that combines a stock buyback, an offer of some of Treasury's shares on the open market, and a premium payment that, at least arguably, leaves taxpayers breaking even. That should prove hard for the Feds to resist, and -- again, depending on how the stock offering is handled -- I think such a deal would be good for GM's stock price, and thus for shareholders.
Is it worth $13 billion to GM to get rid of the Feds and the "Government Motors" tag? It's a lot of money. But, it might turn out to be a bargain.
GM's stock has risen a bit recently, but it's still hovering near its post-bankruptcy low. If Akerson can harness GM's potential and get the Feds to exit honorably, GM's stock could have significant upside over the next couple of years as new products hit showrooms and improvements continue around the world. However, investors need to stay attuned to fluctuating demand and the ability of automakers like GM and Ford to respond in unison. For starters, one of our top equity analysts has compiled a premium research report with in-depth analysis on Ford's competitive edge. To find out what could propel Ford down the road, get instant access to this premium report now.
