Will the United States lose money on the GM IPO? | Business

The US probably won’t get as good a deal on its GM investment(Carlos Barria/REUTERS)

A lot has been made of the fact that much of the US bailout of the banks actually turned a profit for Uncle Sam, or close to it. The auto industry bailout: Not so much.

On Wednesday, GM said it hopes to sell 365 million shares to the public at around $27.50 each in a $10 billion IPO. The share sale would value all of GM at about $41 billion. And that’s the problem. The car company currently owes the government $40 billion from the bailout of the auto maker at the height of the financial crisis. It is possible that the US could still break even on GM, but it’s looking less and less likely. Here’s why:

First of all, the IPO will actually raise the eventual price GM shares have to climb to before the government breaks even on the car maker’s bailout. How’s that? Here’s the math: Right now, the government owns about 60% of GM. The US is selling around 280 million shares in the GM IPO. Based on the government’s current stake in GM, the company would have to sell shares at just less than $44 for Uncle Sam to make a profit. But it isn’t. Instead, GM is selling its first batch of shares at $27.50. So the government will take a loss of about $16.50 on every share it sells. That means the government will have to sell its remaining shares at an even higher price than before to make its money back on the GM bailout.

How much higher? All told, the deal is expected to net the government $7.6 billion. That would leave the US still in the red to the tune of $32.4 billion on GM. That means the government will have to sell its remain 650 million shares at around $50 to get its money back, or about 60% higher than the current proposed IPO price.

How likely is it that GM’s stock would climb to $50 a share? Not very, at least in the near future. As I said above, the GM IPO will give the company a market value of $41 billion. In its most recent quarter, the car company earned just over $2 billion. Given that pace, GM could earn $8 billion in the next 12 months. So the IPO values the company at about 5 times earnings. Sounds cheap, but maybe not for a still troubled car manufacturer that is highly tied to the still weak economy. If GM’s stock was to jump 80% from its offering price to $50 a share, which is the government’s break-even price, GM would then be trading at a market cap of around $70 billion, or roughly 9 times earnings. It’s possible. But that’s the same valuation that Ford gets and pretty much everyone agrees that Ford is in a much better position to grow its earnings that GM.

So let’s assume that GM deserves a 30% discount to Ford’s valuation, which is more than what the bankers setting up the company’s IPO think GM can get. So it seems fair. Based on that valuation, of 6, the company would have to increase its earnings to $11.7 billion a year or 46% more than the company is making a year now to warrant a $70 billion valuation.

GM may eventually turn in that much in annual profits but will take a while. Analysts believe Ford can increase its earnings just under 14% a year over the next 5 years. GM still has a lot of investment to make in its fleet, including rolling out the much-anticipated Volt. So it’s probably fair to say that GM’s earnings, even under the best case, will rise at a slower pace of say 10% a year. Based on that growth rate it will take nearly 5 years for the government to hit its break even point on GM’s shares.

So the question of whether the government will end up making money on GM, or at least breaking even, comes down to how long Uncle Sam is willing to hold onto its stake. 2015? My guess is political pressure will force the government to cash out long before that. If so, it will most likely be at a loss.

funkyfred1933

And if you add in GM’s $45 billion tax break for receiving TARP funds, the taxpayers going to lose that small profit from the bank bailouts many times over. It really pays to run your company into the ground, if you’re politically connected.

http://online.wsj.com/article/SB10001424052748704462704575590642149103202.html
http://djtrudeau.wordpress.com djtrudeau

The second part of this question, one that is essential in figuring out if the cost was worth it, is how much would’ve the government have lost if GM went under?

Public rage and expectations are pretty fickle. What would people be more upset by: the money wasted in the bailout or the thoursands of people out of a job?

If GM continues to operate at a profit and exist well into the future, are the taxes earned, economic activity created, and the initial return on selling the stock all worth the investment made? We’re a long way from knowing for sure.

I do know that people are far less upset about the billions thrown down the drain on defense products no one wants. For some reason, it’s okay to keep spending that money to keep those jobs safe.
http://rodgermmitchell.wordpress.com Rodger Malcolm Mitchell

The comments about the government profiting on GM shares areto t bass-ackward. The federal government, being Monetarily Sovereign neither needs nor uses income. All money coming to the federal government (i.e., taxes, borrowing, etc.) is destroyed as a balance sheet credit.

Even worse, money coming out of the economy, he government, is a loss to the economy. The worst thing for the economy is for the federal government to make a profit on its GM stock. The government’s profit is the economy’s loss.

Not understanding Monetary Sovereignty is the single biggest problem facing the U.S. economy, and is the reason we have a recession, on average, every five years.

Mr. Gandel, I beg you to acquaint yourself with Monetary Sovereignty and its implications.

Rodger Malcolm Mitchell
jcluma

Since it always costs more to make something here in the U.S. than it does in China, outsourcing will always threaten to destroy American industry and our way of life. So the only answer is, the American consumer has to take a stand to sustain U.S. manufacturing now and forever, or it will fail. Backing GM was the common sense and only course to follow, because it represents only the economic tip of the iceberg for the workers’ income it saved. There are all the suppliers, truckers, sales people, marketers, white collar corporate managers and support people — hundreds of thousands of jobs saved by giving it a chance to reorganize. Unlike the greed merchants who run Wall Street and the banks — who taxpayers also saved but without changing how they run — GM will return to our economy the money it needs to contribute to growth and employment for a huge number of people. And GM cars are well-made now — mine has 250,000 miles on it with no rebuilds. Regardless how the stock does the first few months, GM will succeed and so will the tens of thousands in communities across the U.S. who make it so.