It’s Decision Time for General Motors

It has been widely reported that General Motors (GM) is considering selling a huge stake in its financing division, GMAC, in an attempt to sure up its finances. With net income of $2.5 billion expected this year, GMAC is worth somewhere in the $30 billion range, so a majority stake would yield the leading domestic automaker a substantial sum of $15 billion.

What’s interesting is GM’s current value. At $28 per share, Wall Street is valuing the entire company at $16 billion. In essence, GM’s car business has an implied value of negative $14 billion. GMAC itself, therefore, is worth nearly $60 per share.

Maybe GM should try and sell a stake in its auto division, not GMAC. Such a move would substantiate a positive dollar value for the car business, and maybe get the stock price up. If GM could ever sell cars and trucks for a profit consistently, you can see why value investors like Kirk Kerkorian think the upside is tremendous.

Selling GMAC, though, could backfire if the $15 billion generated slowly disappears. Right now GMAC is the life support for GM. Perhaps that’s something they should hold on to in its entirety.

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10 Thoughts on “It’s Decision Time for General Motors

  1. NO DooDahs on October 27, 2005 at 10:56 AM said:

    I can believe that the automobile portion of GM’s business has negative value.

    That’s why they want to sell GMAC – nobody wants to buy the automobile portion! The pension liability would go with it!

    Profit margins for the auto portion since 1999 are 3.2%, 2.7%, 0%, 1.6%, and losses in 03, 04, and YTD 05. DE is over 13? Interest coverage is an ungodly percent of operating cash flow.

    They’re dead, they’ve been dead. They might be able to survive as an automaker with maybe 1/2 the production, but they don’t have the cojones to do that, and no one in management was alive the last time GM was #2 in U.S. market share, so they can’t envision going there voluntarily.

    GM’s only hope is a government bailout of their pension liability, or bankruptcy. Just a matter of time.

  2. NO DooDahs on November 10, 2005 at 5:14 AM said:


    “GM plans to issue the restated earnings for 2001 and any subsequent years before it issues its 2005 annual report next year.”

    “The review indicates GM erroneously booked the supplier credits as income in the year they were received rather than to future periods, GM said.

    GM filed its statement Wednesday evening after the markets closed. The audit committee of GM’s board warned investors not to rely on GM’s financial statements for 2001.”

    From my Nov 3 guest commentary at MarketThoughts:
    “The increase in AR as a percent of sales is classic, it’s indicative of their “zero down” and “zero interest” plans, which started high gear in late 2001. When a company starts aggressively booking sales as sales, even though they haven’t received payment yet, is that a good thing?”

  3. NO DooDahs on November 14, 2005 at 11:59 AM said:

    GM’s Derivatives Show Increasing Bets on Bankruptcy (Update6)
    Nov. 14 (Bloomberg) — Derivatives traders are increasing bets that General Motors Corp. may follow Delphi Corp. and Delta Air Lines Inc. into bankruptcy after the disclosure of accounting errors and four straight quarters of losses.

    Traders last week demanded upfront payments in addition to annual premiums for derivatives contracts that protect owners of the Detroit-based company’s debt should it miss a payment or declare bankruptcy. By doing so, traders relegated GM to the same status as Delphi and Delta just before those companies defaulted.

  4. Chad Brand on November 14, 2005 at 12:05 PM said:

    I wonder what Kerkorian is doing…

  5. NO DooDahs on November 16, 2005 at 9:37 AM said:

    I’m convinced a major motivation for his move was to settle scores with investors that were short GM stock and long GM bonds.

    If money was his motivation for picking up GM shares, he could have done it on the QT for less – instead of making the tender offer.

    So I’m faced with either: (1) the old man has lost it, or (2) making money on the deal wasn’t his motivation. Discarding option (1), what was the outcome of his offer? He didn’t get all the shares he said he wanted, but a lot of hedge funds had some serious spanking put on them.

    If I were a old billionaire that wanted to screw over some enemies or settle some old scores, it would be worth a few million to do it. After all, you can’t take it with you!

    Now perhaps there was some other non-monetary motivation driving Kerk, but it’s hard to get to be that old and that rich without enemies and resentments …

  6. NO DooDahs on November 16, 2005 at 9:51 AM said:

    People rarely do any one thing for just ONE reason. Perhaps he sees turnaround, liquidation, gaining control of the company, etc. as primary goals, but used the “tender offer” to satisfy a tertiary goal of settling some scores … or perhaps it was just a mistake.

    Supposedly he kept buying until he got to just a hair under 10% in order to avoid being an “insider.”

    If and only if the company can survive to September 2007 (union contract) AND make headway in the field of product design and expense cuts by then, would this company be a “buy” IMO. Until then it’s either stay away or short.

  7. Chad Brand on November 16, 2005 at 10:03 AM said:

    It’ll be interesting to see if he takes further action aside from a getting a board seat, i.e. pares back the position or adds to it. I suspect he sits tight.

    I haven’t shorted it, so for now just staying away. I don’t think it’s worth paying the 9% dividend to short it, although hopefully they’d cut that down significantly.

    I don’t think the bankruptcy risk is an immiment as some (sometime in 2006) are suggesting, but it’s surprising that they haven’t addressed any operational issues yet, only UAW concessions. It’s almost as if they believe in their current operating strategy/structure, which is just ludacrous, in my opinion.

    Their balance sheet is decent enough that they don’t need to panic and make drastic changes overnight, but still, why not get the ball rolling and make sure you don’t have trouble lasting another couple of years. Baffling to me.

  8. NO DooDahs on November 16, 2005 at 2:42 PM said:

    I just looked at their balance sheet, and I find it far from decent.

    From the QE 9/4 to QE 9/5, “total equity” went down from 27.781 billion to 22.424 billion. If you exclude intangible assets from consideration, equity went from 23.049 billion to 17.625 billion. Note the increase in “other non-current liabilities.” So they have destroyed, in one short year, between 19.3% and 23.5% of their equity. Meanwhile, inventories as a percent of revenue have climbed from 0.268 to 0.300 and in absolute terms, their inventories are increasing. YTD, their interest payments have exceeded their operating cash flow. If the short interest wasn’t already so high, I would be adding few shares to it … neither you nor I could survive with the financials GM has. While they LOOK flush with cash, it’s only because they are destroying equity rather than burning cash in hand, through taking on increasing amounts of “non-current liabilities” rather than spending the actual cash.

  9. Chad Brand on November 16, 2005 at 2:49 PM said:

    It’s not a good balance sheet, obviously after the year they had it’s going in the wrong direction, but it’s decent enough for them to make the neccessary changes they need to. They also have GMAC and a ton of credit they could tap. Why they aren’t taking action and using some of their cash to make improvements is baffling. It’s true they save billions next year with healthcare concessions next year, but that’s just a temporary fix. Imagine how much better ’06 financials would improve over ’05 if they actually took meaningful action with respect to operations.

  10. NO DooDahs on November 16, 2005 at 3:07 PM said:

    “Meaningful action with respect to operations.” Hmm. I don’t think current management is capable, psychologically, of doing what needs to be done. If Kerk has a plan, IF, I still doubt he has enough influence and time to get it implemented in the face of management. Bailout, bankruptcy, or perhaps acquisition and splitting off the pieces a la “Pretty Woman” or “Other People’s Money.”

    In my opening comment … “They might be able to survive as an automaker with maybe 1/2 the production, but they don’t have the cojones to do that, and no one in management was alive the last time GM was #2 in U.S. market share, so they can’t envision going there voluntarily.”

    I think, when they are AGAIN #2 in U.S. market share, no one in management will be alive, either. Hah! I slay myself! LOL!

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