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Why would GM do this? [#permalink]
07 May 2009, 02:33
GM has filed a paper with the SEC, "PRE 14C" which lays out a plan to dilute its common stock, by issuing new shares to the U.S. Treasury in exchange for debt.
GM will issue enough new shares so that the total number outstanding will be 62 billion. There are currently about 610 million shares outstanding. This is a dilution of 100:1. This will reduce the "par value" of $1.66 to $0.01/share. They will then do a reverse split of 1:100, reducing the outstanding shares back to 620 million.
The effect of this is that current common stock holders will be wiped out.
Example: you own 1000 shares which are currently worth around $1600. Your 1000 shares will become 10 shares, worth about $16. total. That's a loss of 99%.
Why would GM do this? Is it just the only way to get some $$$ from the gov't?
Re: Why would GM doing this? [#permalink]
07 May 2009, 03:21
I believe this is the mechanism for the government plan to take a 50% stake, with another 39% going to the UAW, in exchange for the outstanding debt those groups hold (the UAW is owed $$ for healthcare benefits). It's basically like a bankruptcy, wiping out shareholders in favor of creditors who take an equity stake in the newly emerged company. However, the the other difference between the government plan and bankruptcy is that the government plan is not considering traditional rules of the seniority of creditors that would be considered in a bankruptcy case, which is why, similar to the attempted Chrysler deal, some creditors are not happy.
In the end, whether by bankruptcy or government fiat, GM common shareholders are getting wiped out. As they should, since they invested in a business that failed.