GM's 1-for-100 Reverse Split? Uh-Oh...

It’s official; General Motors (GM) common shares are in their final death throes.

Yesterday, General Motors indicated its intention to seek a 1-for-100 reverse split on its common stock. If you’re wondering what a reverse split is, Investopedia has a fairly accurate definition and example:

Investopedia Definition:
A reduction in the number of a corporation’s shares outstanding that increases the par value of its stock or its earnings per share. The market value of the total number of shares (market capitalization) remains the same.

Investopedia Example:
For example, a 1-for-2 reverse split means you get half as many shares, but at twice the price. It’s usually a bad sign if a company is forced to reverse split - firms do it to make their stock look more valuable when, in fact, nothing has changed. A company may also do a reverse split to avoid being delisted.

So what does this mean for GM shareholders? Well, if you own 100 shares at today’s closing price of $1.85, and if the reverse split were to happen tomorrow, your 100 shares would now be shrunken down to 1 share worth $185. Far more often than not, especially for companies facing serious trouble (as GM is), the $185 share price post-reverse split will drop fast and hard.

As far as I’m concerned, if you’re invested in GM, get out now. At $1.85 per share, the price is insanely overvalued. If you want American car manufacturing exposure, choose Ford (F). They aren’t treating their shareholders like dirt, and they actually have a viable business model without the support of the government.

Disclosure: Freund Investing Managing Member Ryan Freund holds no position in any of the companies mentioned in this article. Freund Investing has a solid Disclosure Policy.

Comments

[djj420:]

I'm short GM in a stock-picking game. This should be a good day for me there. I've tried to short GM in real life, but could never get the shares.

May 06 08:44 AM

[Steve in Gr...:]

Thanks, Mr. Freund, for the useful note.

Clicking through to your CNBC link above: "...GM said in an SEC filing that the reverse split deal would be part of an agreement with the Treasury Department to swap at least half of GM's debt to the government for company shares..."

On 4/17/09, the WSJ noted in its Marketplace section that Obama's task force was pressing GM to drop the GMC brand. Of course, the willful destruction of a valuable brand like GMC (particularly GMC trucks) would be a disaster for GM.

So we begin to see how the rocket-scientists in the Obama administration are restructuring GMC. Maybe they could focus on fixing Amtrak and the U.S. Postal Service and leave GM alone.

May 06 08:58 AM

[mbkelly75:]

Rocket-Scientists indeed! It looks like Chicago politics at it's best.(which is REALLY bad for pretty much all concerned if you are unaware of Chicago's rep for crooked politics). This will be a good day for the short-sellers if for no one else.

May 06 09:41 AM

[dw57:]

not sure why you would stay in any of them. Ford is only months away from having to ask for help. In their last filing they stated if the car market stayed above 10 million they wouldn't need help. last check, it hasn't made it to that level and it would appear to be very unlikely to any time soon (maybe in 2011, but not before). and that same filing indicated they would then need a loan if the market wasn't better. and we went down faster than expected. China wasn't expected to have a bigger car market till maybe 2015 or later. they already have a a bigger market (so far appears to be headed to 12 million per year).

May 06 11:16 AM

[zagrebzagreb:]

What is the value in attaching a GMC logo to what is essentially a common Chevy? Dropping the GMC 'brand' is long overdue... I find it hard to believe that anyone who knows the auto business would argue otherwise.

Much like British Leyland did in the disastrous 70's, GM decided to build brand equity (and ego) around the parent corp - by simply adding logos to MG's Triumphs, etc and mentioning Leyland's name in adverts.... Net effect? zero. In fact, you could argue that this sort of branding 'solution' to what is actually a product problem is the sort of distraction and money waster that sunk the whole company.

Far from incriminating Obama's auto experts, dropping GMC is the sort of rational thinking needed but lacking at GM.

May 06 11:41 AM

[TeresaE:]

First, bankrupt (finish) the shareholders

Then the suppliers

Then the bondholders

Then the rest of us.

In all these grandiose plans for banking & auto coming from Washington, only one thing is clear: bad news for the customers (former suppliers, employees, shareholders) and great news for the executives, lawyers, and UAW.

Fools all. Every day another American company announces they are laying off more of my customers.

Yours too.

May 06 12:00 PM

[helper:]

$185? wow

Ryan, you forgot to mention that it's either zero in bk, or you get the dilution first - taking holders to 1/100 (~ <0.02) before the reverse split takes those lower number of shares held back to ~$1.50. Further read the warnings in the filing about the potential for the price to remain above $1 listing requirements after the split.

May 06 12:51 PM

[djj420:]

The dilution should be about 10:1, and the reverse split is 100:1. So, if they both occurred instantly and in a vacuum; the currently outstanding shares would be 1/10th as valuable with a ticker price that's ten times higher. These processes are hardly happening in a vacuum, though: the company is bleeding red ink.

May 06 06:53 PM

[Old Trader:]

dw57,

Its entirely likely that Ford may pick up some market share at the expense of both Chrysler and GM. There will be some people determined to "buy American", but won't trust the administration's vow that warranties will be honored.

Additionally, they DO have some decent products, at least to some relatively recent consumer ratings.

Whether this will be enough...who can say, but I'd think they've got a shot at remaining independent and viable.


On May 06 11:16 AM dw57 wrote:

> not sure why you would stay in any of them. Ford is only months away
> from having to ask for help. In their last filing they stated if
> the car market stayed above 10 million they wouldn't need help. last
> check, it hasn't made it to that level and it would appear to be
> very unlikely to any time soon (maybe in 2011, but not before). and
> that same filing indicated they would then need a loan if the market
> wasn't better. and we went down faster than expected. China wasn't
> expected to have a bigger car market till maybe 2015 or later. they
> already have a a bigger market (so far appears to be headed to 12
> million per year).

May 06 07:14 PM

[KIT:]

>So this makes it shortable, no? If so, going back to 50 atleast.

$0 to $50 for Govt and CAW ,regular shareholder has to absorb the loss first

May 07 04:47 AM