Are Taxpayers Still on the Hook in the General Motors Deal?
U-M Finance Professor M. P. Narayanan does the math on the GM share buyback from Treasury.
ANN ARBOR, Mich. — In earlier parts of the General Motors saga in 2009 and 2010, I had written that the market cap of GM needs to be at least in the $65 billion to $80 billion range for taxpayers to break even financially from the bailout. These figures were based on the information at the time of the bailout and IPO. Now with the announcement that GM will buy back $5.5 billion worth of stock from the U.S. Treasury and unwind its remaining stake by 2014, let us take another look at the financial viability of the bailout.
On Dec. 19, 2012, GM announced it will buy back 200 million shares held by Treasury at $27.50 per share, for a total of $5.5 billion. This was at a 7.9 percent premium over the GM closing stock price on the previous day. Treasury had provided a total of $49.5 billion to GM, out of which $6.7 billion was in the form of a loan and $2.1 billion was in exchange for Series A preferred stock. In exchange for the remaining $40.7 billion, Treasury received about 912 million shares, constituting a 60.8 percent stake in GM. The loan was paid back by April 2010, and the preferred stock was paid back by December 2010. We will assume fair rates of interest and dividends were paid for the debt and preferred, respectively. This leaves $40.7 billion that has to be recovered from the sale proceeds of the common stock held by Treasury. The IPO in November 2010 yielded $13.5 billion, leaving $27.2 billion to be recovered.
After the buyback of $5.5 billion, Treasury is still owed $21.7 billion. What should GMís value be for Treasuryís stake to be worth $21.7 billion? Note that we are assuming the investment was riskless and ignoring the time value of money, and that getting back the original amount provided is sufficient.
My calculations show that, for Treasuryís GM stake to be worth $21.7 billion, GMís market cap has to be about $100 billion. Before the buyback, Treasury owned 31.75 percent of the 1,575 million GM shares outstanding. After the buyback, it will own 21.82 percent of GM shares. If GMís market cap is $100 billion, then Treasuryís stake will just exceed the $21.7 billion it is owed.
Will GM be worth $100 billion in a year? Well, the analysts donít seem to think so. According to Thomson Reuters, the median stock price target for the end of 2013 (around the time the Treasury expects to dispose of the remaining shares) is $35 per share, and the maximum is $44 per share. This means median and maximum analyst expectations for GMís market cap at the end of 2013 are $55 billion and $69 billion, respectively — a far cry from the $100 billion needed for Treasury to break even.
Of course, the goal of the bailout was clearly not financial gain, but to prop up the economy. On the basis of the median analystís expectation, Treasury will recover 21.82 percent of $55 billion, which works out to $12 billion. This means Treasury would have recovered a total of $31 billion — $13.5 billion from the IPO, $5.5 billion from the December 2012 buyback, and $12 billion for its remaining stake — of its $40.7 billion investment in GMís equity. Based on our assumptions of no risk and no time value, it would have incurred a loss of just under $10 billion.
Did the bailout prevent at least a $10 billion loss to the economy? The answer to this question will be hotly debated ad nauseam, with people coming down on either side of the question depending on their political beliefs. The reason it is difficult to answer the question is the appropriate benefit from the bailout to consider here is the incremental benefit — that is, the benefit over and above what might have happened if the bailout did not take place. For example, what would have happened if GM had gone through a "normal" restructuring under Chapter 11 of the bankruptcy code without government intervention? How many more jobs were saved by the government bailout compared to this alternative, and what was the resultant incremental benefit to the economy?
Even more difficult to estimate is the impact on future decisions by auto companies created by expectations of similar bailouts. Has the government propped up a noncompetitive company, thereby adversely impacting other auto companies? Since these counterfactuals are unobservable, the debate will be never-ending — like the sports bar debates that follow the BCS championship game!
Written by M.P. Narayanan, the Robert Morrison Hoffer Professor of Business Administration, professor of finance; and chair of finance at Ross.
— Greta Guest
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Greta Guest, 734-936-7821, firstname.lastname@example.org