On news that GM (GM) has put together a new and very aggressive restructuring program, its shares are higher by 22% to $2.07, which gives the company a market cap of $1.28 billion. With the large amounts of equity that GM is offering in exchange for $27 billion in debt from creditors, for part of its financial obligation to the Treasury, and for money it owes the UAW pension plan, current common shareholders will end up with 1% of the company.
That would value the firm at about $130 billion after all of the transactions are done, based on the stock price of GM today
With Toyota’s (TM) market value at $138 billion, the GM number is a bit of a stretch.
GM will do a number of things to improve the value of the company. The liabilities that the company is planning to cut total $44 billion, according to the new plan it has filed with the SEC. In addition to reducing these obligations, GM will cut another 20,000 blue-collar workers, about 34% of its remaining in-plant workforce.
Another advantage GM picks up in the restructuring is the the hourly costs of its labor will be approximately what Toyota’s is in its US plants. That and the elimination of brands including Pontiac and several plant closings should bring GM’s breakeven point down to its current market share if annual US light vehicle sales are above 10 million units a year.
All of these factors probably do bring GM’s value closer to $50 billion on the elimination of debt alone. The company’s operations in China and Latin America have been profitable and probably have substantial value, but they have not been enough to come anywhere close to eclipsing its problems in the US.
The swing factor in the GM plan is US market share, and it is a huge issue. GM’s piece of domestic light vehicles sales has been about 22% over the last year. It may be very hard for the company to maintain that if it shuts Pontiac and several smaller divisions. Ford (F), Toyota (TM), and a number of smaller car companies working on building a presence in America will do everything that they can to take advantage of GM’s vulnerability.
The fact of the matter is that the most important issue for GM has not changed. Whether it has a high debt load or none. Whether its has low labor costs or not. Whether it has all the model lines that it did a year ago or slightly fewer. If GM can’t sell cars and trucks in the United States and add rapidly to its market share, the company is worthless.
Douglas A. McIntyre
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