Is GM Worth $125 Billion?

Apr.28.09 | About: General Motors (GM)

Investors cheered GM's debt exchange offer, but are buyers of GM stock making a mistake? Consider the following language from the company's press release:

The aggregate amount of GM common stock to be issued to the U.S. Treasury (or its designee) pursuant to the U.S. Treasury debt conversion and to the new VEBA pursuant to the VEBA modifications would represent approximately 89 percent of the pro forma GM common stock (assuming full participation in the exchange offers), with the final allocation between the U.S. Treasury (or its designee) and the new VEBA to be determined in the future. Of the remaining pro forma outstanding GM common stock, noteholders would represent approximately 10 percent, and existing GM common stockholders would represent approximately 1 percent. [emphasis added] We determined the foregoing GM common stock allocations following discussions with the U.S. Treasury where the U.S. Treasury indicated that it would not be supportive of higher allocations to the holders of notes or to existing GM common stockholders.

Let's pause for a minute to let this sink in: Even without a bankruptcy filing, GM shareholders will be left with 1% of the company. While this is certainly better than 0%, it is not much better. Post-debt exchange GM would need to have a market cap of $125 billion for the stock price to simply stay unchanged at the recent quote of $2.04 per share. This is because the share count would go from roughly 600 million shares to 60 billion shares!

If you have any money invested in GM common stock, the time is now to consider what those shares are worth. As Warren Buffett has said, the market is there to serve you, not to instruct you. The market's jubilant response yesterday to the GM debt exchange offer proves Buffett's point.

One cautionary note: If you are thinking of selling GM shares short, be very careful. It appears there is already a monster short position in the stock (which most likely got a lot bigger yesterday). A Volkswagen-style short squeeze could make even the best-laid short plans blow up if your position size is too large.

Disclosure: No position.