Stephen Foley: Why it doesn't matter if the US government makes a profit on GM
Saturday 21 August 2010
US Outlook: Can US taxpayers be made whole on their bailout of General Motors? The car-maker published paperwork for its return to the stock market this week, but it will take some time to fill in the important numbers – namely, the number of shares that will be sold, and their price.
Already, there is a fixation on one particular figure: $70bn. This is the market capitalisation that GM must achieve if the US Treasury is to show a profit on its 61 per cent stake in the company. Taxpayers, you will remember, pumped a total of $49.5bn into GM to keep it operating through the worst of the credit crisis, through bankruptcy proceedings, and through a painful restructuring process.
Some $6.7bn of the money was converted into a formal loan, which has been repaid. The rest became equity, which is why the market price of the shares will determine whether the Treasury can expect to get its money back in full or not.
So $70bn is a highly emotive benchmark. There are signs that the Treasury only signed off on the flotation – at what is still an early stage in GM's recovery, after just two inconclusive quarters of profitability – because bankers persuaded it that the valuation will come in above that magic number. Insiders have floated estimates of $16bn for GM's earnings before interest, tax and write-downs (Ebitda) for next year and suggested that this would justify the $70bn price tag, should investors apply a similar Ebitda multiple as they do for its publicly-traded rival Ford.
It all looks a bit racy for my taste. If you instead prefer top-line revenues or bottom-line earnings, GM would have to achieve a step-change improvement if it is to get to $70bn on the same multiples as Ford. And there is a compelling argument for putting GM on a discount to Ford. Without the blot of bankruptcy and bailout in its recent past, Ford has been on a roll. It is winning market share, it has earned plaudits for the reliability and pizzazz of its new cars, and its management has proved much more consistently impressive. GM is still having to offer above-average discounts to shift its clunkier range of vehicles. Ford deserves the higher rating.
It is better for GM's sponsors to shoot for a reasonable valuation at the outset than to aim high and watch the shares tank.
The $70bn is a red herring, in any case. Remember back to those final months of 2008, when GM teetered on the brink of oblivion. An uncontrolled bankruptcy that shuttered its factories would have had consequences far beyond the company and its workers. About one million jobs were dependent on GM and the other bailed-out Detroit car-maker Chrysler, either directly or through a network of suppliers which could have been snuffed out one by one. Letting GM go would have been economic madness in the depths of any recession, let alone during the terror of those few months after the collapse of Lehman Brothers. The costs in lost economic output, falling tax revenues and sky-high unemployment would easily have run into tens of billions of dollars. Whether GM is worth $70bn, or $100bn, or $50bn, the investment has already proved a good deal for taxpayers.
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