Stephen Foley: Why it doesn't matter if the US government makes a profit on GM

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.

Start your day with The Independent, sign up for daily news emails
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

Syria civil war: Meet the military commander who says his soldiers will not rest until every inch of their war torn country is free of Islamist 'terrorists'

‘We won’t stop until Syria is back to normal’

Near the front lines with Islamist-controlled towns where Assad’s troops were besieged just last month, Robert Fisk meets a commander confidently preparing his soldiers for battle
The inside story of how Bill Clinton built a $2bn global foundation may undermine Hillary's chances

The inside story of how Bill Clinton built a $2bn global foundation...

... and how it may undermine Hillary's chances in 2016
12 best olive oils

Extra-virgin, cold-press, early-harvest, ultra-premium: 12 best olive oils

Choosing an olive oil is a surprising minefield. Save yourself the hassle with our handy guide
Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at long last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

Wiggins worried

Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back