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# Why would GM do this?

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VP
Joined: 28 Feb 2008
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Why would GM do this?  [#permalink]

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07 May 2009, 03:33
Quote:
GM Mega-Dilution

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?

RF
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Re: Why would GM doing this?  [#permalink]

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07 May 2009, 04:21
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.
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07 May 2009, 13:19
Thanks Jerz.

So the UAW is taking equity in the company in exchange for its health care liability? Wow, so they might lose it all too?

RF
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Re: Why would GM do this?  [#permalink]

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10 May 2009, 17:28
I'm not following this clearly - but if GM have made such an application, surely the common shareholders have started dumping GM stock like a hot scalding potato ?
VP
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10 May 2009, 17:45
bsd_lover wrote:
I'm not following this clearly - but if GM have made such an application, surely the common shareholders have started dumping GM stock like a hot scalding potato ?

Good point bsd!

As of Friday the stock is hovering around \$1.50.

Why would it still sell for \$1.50 if the stock will be worth \$0.01 after GM dilutes it?

RF
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11 May 2009, 13:37
refurb wrote:
Why would it still sell for \$1.50 if the stock will be worth \$0.01 after GM dilutes it?

It would appear that proposed stock dilution might not go through at all. That would explain why people are still buying the stock at \$1.50.

But the question remains, why do people think a bankrupt company's stock is worth \$1.50? Potential value if the company is acquired?

RF
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Re: Why would GM do this?  [#permalink]

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11 May 2009, 16:58
Possibly an outside bidder?
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11 May 2009, 17:30
89nk wrote:
Possibly an outside bidder?

Right, so if GM get acquired by another company before it goes bankrupt, maybe they'll make some money?

RF
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Re: Why would GM do this?  [#permalink]

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13 May 2009, 16:21
refurb wrote:
89nk wrote:
Possibly an outside bidder?

Right, so if GM get acquired by another company before it goes bankrupt, maybe they'll make some money?

RF

I would think it is a far left side possibility. I am by no means in the plug with the industry.
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Re: Why would GM do this?  [#permalink]

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16 May 2009, 04:28
I can't imagine anyone wanting to buy GM outright, since they'd also be buying the massive obligations and headaches that have put GM in this mess.

Maybe people are thinking that there's value to breaking up the company and selling off component parts?
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Re: Why would GM do this? &nbs [#permalink] 16 May 2009, 04:28
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# Why would GM do this?

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