By on September 9, 2010

Digging through the finances of a company as large as GM is never an easy task, especially when the balance book in question was recently wiped clean in a bailout-bankruptcy. Luckily, Bloomberg columnist Jonathan Weil has the chops to do the task justice, and he’s come up with a fascinating insight: through the power of an accounting tool known as “Goodwill,” Weil claims that GM has juiced its assets and liabilities during its “fresh start.” He notes with TTACian zeal:

It’s as if a $30.2 billion asset suddenly materialized out of thin air. In the upside-down world that is GM’s balance sheet, that’s exactly what happened.

The short version: GM undervalued some assets and overvalued some liabilities during its “fresh start.” The scary result: improvement in GM’s performance and creditworthiness could actually lead to writedowns on its Goodwill… which is currently The General’s largest non-current asset. Oh yes, and without that $30.2b in Goodwill, GM would have about an equity value of -$6.3b. Welcome to the new General Motors…

GM’s pre-IPO S1 filing has this to say about Goodwill:

At December 31, 2009 Goodwill was $30.7 billion. In connection with our application of fresh-start reporting, we recorded Goodwill of $30.5 billion at July 10, 2009. When applying fresh-start reporting, certain accounts, primarily employee benefit and income tax related, were recorded at amounts determined under specific U.S. GAAP rather than fair value and the difference between the U.S. GAAP and fair value amounts gave rise to goodwill, which is a residual. Our employee benefit related accounts were recorded in accordance with ASC 712, “Compensation—Nonretirement Postemployment Benefits” and ASC 715, “Compensation—Retirement Benefits” and deferred income taxes were recorded in accordance with ASC 740, “Income Taxes”.

Further, we recorded valuation allowances against certain of our deferred tax assets, which under ASC 852 also resulted in goodwill.

But, Weil points out that

This isn’t the way goodwill normally works. Usually it comes about when one company buys another company. The acquirer records the other company’s net assets on its books at their fair market value. It then records the difference between the purchase price and the net assets it bought as goodwill…

GM’s explanation? The company said it wouldn’t have registered any goodwill under fresh-start reporting if it had booked all its identifiable assets and liabilities at their fair market values. However, GM recorded some of its liabilities at amounts that exceeded fair value, primarily related to employee benefits. The company said the decision was in accordance with U.S. accounting standards on the subject.

Confused? You probably should be. Unfortunately, Weil doesn’t get any more specific about what assets GM over- and under-valued, but he does explain the mechanics of just how this short-term tactic could hurt GM over the longer term.

The difference between those liabilities’ carrying amounts and fair values gave rise to goodwill. The bigger the difference, the more goodwill GM booked. In other instances, GM said it recorded certain tax assets at less than their fair value, which also resulted in goodwill.

On the liabilities side, for example, GM said the fair values were lower than the carrying amounts on its balance sheet because it used higher discount rates to calculate the fair value figures. The higher discount rates took GM’s own risk of default into account, which drove the fair values lower.

Here’s where it gets really funky. If GM’s creditworthiness improves, this would reduce the difference between the liabilities’ fair values and carrying amounts. Put another way, GM said, the goodwill balance implied by that spread would decline. That could make GM’s goodwill vulnerable to writedowns in future periods, which would reduce earnings.

A similar effect would ensue on the asset side if GM’s long-term profit forecasts improved. Under that scenario, GM could recognize higher tax assets and bring their carrying amount closer to fair value, narrowing the spread between them.

So, to sum up, the stronger and more creditworthy GM becomes, the less its goodwill assets may be worth in the future. An intuitive outcome, this is not.

No doubt, but neither is it the most shocking news ever. After all, GM has a long and rich history of sacrificing long-term health in order to book short-term gains. And if GM admits, as Weil claims, that absent a deliberate overvaluation of assets it would have negative equity going into its IPO, that’s clearly one bad habit that is dying hard. Add the fact that GM also admits to having problems with its financial controls and an inexperienced CEO, and it becomes difficult to understand why anyone should consider investing in the government-owned automaker. If, at fair market valuations, GM is worth negative equity after taxpayers dropped $50b on it, one can’t help but wonder what the bailout bought.

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28 Comments on “Does GM Have Negative Equity?...”


  • avatar
    gslippy

    Q: “one can’t help but wonder what the bailout bought”
     
    A: Union love.  And the $41k Volt economy car, a vehicle “Americans want to buy”.
     
    GM has too much to risk to do an IPO right now.  I don’t see it happening.

    • 0 avatar

      Agreed. The preliminary filing allows politicians to talk-up the forthcoming IPO — “look what we’re going to do! GM will be back in private hands real soon!” — ahead of the election.

      After November 2 (and given the way polls are trending, with many of those same politicians now booted out on their asses) we’ll see Government Motors quietly retreat, and vaguely hint at an IPO sometime in ’11 or even beyond.

      It’s all theatre… and not great theatre.

  • avatar
    rnc

    I am failing to see the problem here, they are overvaluing liabilities and undervaluing assets and the difference is recorded as Goodwill (has to go somewhere) A(-)L(+)E(=)0.  The more money they make (than planned), the more deferred tax assets they can use and the goodwill is written off (good).  They company and markets perform better than anticipated and spread b/t recorded liabilities (pension and healthcare) and thier actual value drops and the goodwill is written off (good), what they are doing is long term planning and leaving some wiggle room so that they don’t have to take write-offs or record additional liabilities after the IPO b/c no one really knows what the “new normal” for the car market is.

  • avatar
    Educator(of teachers)Dan

    Has anybody honestly sat down and tried to figure out what GM would be “worth” if it was suddenly offered for sale on the open market?  GM to me is like a giant stone cathederal that suddenly has a “For Sale” sign in the front yard.  What would the building inspector find and would the thing even be safe for human habitation?  It feels like no one has been performing the basic upkeep on the building.
     
    I truely want GM to succeed, I like certain products, but I don’t know if as a business proposition the company is still viable.

    • 0 avatar
      Joshua Johnson

      I have begun preliminary valuation procedures of GM utilizing the asset approach to value.  It must be understood that these figures are adjusted from the amounts provided for in GM’s S-1 per valuation principals.  Additionally, there is much more analytical work involved in these calculations than there is room to explain.
      To begin with, I have taken GM’s adjusted, projected first year forward EBITDA (assuming similar margins and cost structure to June 2010 TTM) and subtracted out economic depreciation and required return on invested capital.  What remains is called excess earnings, and I have then capitalized that amount with a rate commensurate with heavy manufacturing companies with extensive fixed assets.  The resulting figure is the company’s “true” goodwill.  Next, all of GM’s working capital and fixed assets are added together with the goodwill to arrive at a market value of assets.  Subtract long-term liabilities and obligations, and what remains is the company’s fair market value.
      I remind everyone that is a very rough first-pass calculation and further refinement and analysis is required:
      First Year Forward EBITDA (estimated) – $8.4Billion
      Economic Depreciation for Land, Improvements, M&E, CIP and Specialized Tools – $1.1Billion
      Return on Invested Capital for Working Capital, Land, Improvements, et al – $2.0Billion
      “Excess” Earnings = $5.3Billion, which capitalized at 25% = $21.2Billion
      Add back the adjusted value of Working Capital, Land, Improvements, et all – $31.7Billion
      Add on “Other Assets” outside of normal operating requirements – $13.0Billion
      Total Assets of GM (approximately) = $65.9Billion
      Subtract long-term liabilities/obligations = $56.2Billion
      Very rough 100% fair market value of GM thus equals about $9.7Billion.
      In this analysis, I have been optimistic and converted the preferred stock and minority interests to common stock.  Otherwise subtract another $7.9Billion for those interests.  It is very possible that I made mistakes in this calculation, so please correct me if anything seems out of line.

  • avatar
    Motorhead10

    GM overvalued some assets and undervalued some liabilities during its “fresh start.”

    shouldn’t that be the opposite? – they valued tax assets below fair value and valued the carrying amount of liabilities above -

  • avatar
    AaronH

    “…one can’t help but wonder what the bailout bought.”

    Votes.

    In key “swing” states.

    Welcome to bratty criminal parasite Democracy…Right Pericles?

  • avatar
    carguy

    What institutional investors (and the market) think GM is worth we will see after the IPO. Until then I would take what take both of what GM and what Jonathan Weil says with a grain of salt.

  • avatar

    two words explain it all…”Material Weaknesses”. until such time as Deloitte is given the boot and true professionals are employed as auditors, stay away from investing in this circus.

    • 0 avatar
      psarhjinian

      I’ve worked for another big-four firm (KPMG) and with both Deloitte and PWC in the past.  I haven’t worked with E&Y,  but the reality is that none of these firms, nor many of the second- and third-tiers are really “professional” in the sense that you’re thinking.
       
      It’s an inherently incestuous business.  C’est la vie.

  • avatar
    Daanii2

    “Goodwill” is just an accounting fiction. I don’t see what Jonathan Weil is trying to get at with his analysis. Makes no sense to me.
     
    What does bother me about the GM situation is the same as the Tesla Motors situation. When the government has just given companies like GM and Tesla huge amounts of their capital, they distort the industry. They artificially support the weaker companies and harm the stronger companies.
     
    In the short run, that may sometimes help. In the long run, that always harms. Always.
     
    One fact that jumps out at me from Tesla is that the main effect of the government’s “loan” to Tesla has been to make Elon Musk a billionaire. Sure, that’s just on paper. But he did clear enough on the IPO to pay off debts and fund his extravagant lifestyle for a few more years.
     
    In my mind, that’s not what the government is supposed to do.
     
    Who will the GM IPO benefit? GM executives, the unions, the investment banks. Wish I was on that gravy train instead of, like most Americans, just paying for it.

  • avatar
    VLAD

    GM is .gov sponsored Ponzi scheme that tries to earn money in China to stuff UAW and “community organizer” pockets in US.

  • avatar
    Steven02

    Maybe I need to take a few more accounting classes, but I am not sure how this is a bad thing for GM.  It is really… nothing.  If the liabilities are over valued, meaning that GM actually OWES less money than they are reporting, that would be a good thing for GM.  If the assets GM is reporting are undervalued, it means that they are worth more to the company.  The difference between assets and liabilities is the capital in the company.  Sounds like GM is ok here.  If the assets go up and the liabilities go down, I could see a goodwill number changing, but I don’t see how this would in anyway cause a problem.

    • 0 avatar
      Sugarbrie

      Some liabilities might be estimated such as pending litigation where GM is the defendant.  There may even be something left over from the bankruptcy.   It is easy to value a simple loan; it is the principal balance.  When you know you will owe something, but don’t know how much, you still have to disclose it and make your best estimate of the potential liability.

    • 0 avatar
      Steven02

      I understand this and agree.  But, if the liabilities are overvalued, it means that they owe LESS that what is on the books.  This is only going to help GM.

  • avatar
    obbop

    What about my and others’ efforts to warn consumers about the perils of buying GMC / Chevy / etc. regarding lack of warranty repairs… even safety-related defects?
    For 5 years or so I have made a goomongous number of comments at a horde of Web message boards attempting to warn others of my factual real-life negative experiences.
    I have read others’ negative comments about similar or exactly the same negatives I experienced though I DID note that my negative experiences did appear to be concentrated in the “heartland,” the non-coastal areas of the USA where the “Big 3″ TENDS to be more entrenched in the consumer’s hearts and minds than the coastal areas are.
    I also, whenever the opportunity allowed, warned consumers in real-life non-Web situations of the many horrors I underwent regarding the failure of GMC to honor their warranty and tried to play me for a fool with their gibberish and double-talk and basic anti-consumer attitude and disrespect of morals and legalities.
    Can’t fight city hall and corporate America except in a few very rare circumstances and my circumstances were such that legal routes were not available to me… well, cost-effective routes, any way… and GMC and their dealers I interacted with knew it.
    If enough folks such as I are out there broadcasting the facts as we know them I wonder if there can be a cumulative effect?

    • 0 avatar
      Loser

      obbop,
      Are you another GM piston slap victim? They told me my piston slapping 5.3 was normal and not a problem. Don’t let TTAC’s resident GM apologist/Ford basher catch you saying anything negative about GM.

  • avatar
    johnny ro

    The GAAP message is that GAAP does weird things. Don’t blame GM or DT or the FASB.

    Don’t try to go cashing out that equity number either, down in the treasury department. Its obviously not real.

    The true equity (not the GAAP equity), would reflect a blank check held at GM, and all GM has to do is fill in the number and cash it. I.e. implicit future support – the USA’s ability to continue with seemingly unlimited borrowing against China’s trade surplus to finance future GM bailouts among other things, multiplied by the willingness of the Feds to carry this particular support out.  There are countless billions available to support GM on a go-forward basis. That well is bottomless if the stars are in alignment.

    The reason this is not in the GAAP financials is its not contractually established and quantified. Thats why. But its right there where I am pointing, right there, right next to the healthcare and inflation gorillas in the room.

  • avatar
    wallstreet

    I fail to comprehend why investors are buying GM IPO. I’m ready to short as long as uptick rule does not prohibit me from doing so. God bless this free market.

  • avatar

    they’re getting ready to borrow another ten or fifteen billion from the feds. wonder how the banksters will siphon off these buckaroos?

  • avatar
    DenverMike

    As a potential voluntary share holder, I have to know which models are sold at a loss, how big a loss and why. I can halfway understand the Volt being sold at a loss (here and China), but what about the Corvette? Is the Corvette competing with anything domestic? OK, let’s not speak about killing the Corvette but I demand full exposure and open books. Or should I just trust GM and hand over cash blindly?

  • avatar
    ronin

    If you want to know what the Bailout bought, follow the money trail to the banks that held the debt.
    Like every one of the bailouts over the last two years, it too was ultimately a bank bailout.
    No matter whether sold to the public as a jobs bailout, a householder bailout, or whatever, they ultimately went to the banks.
    Wait, I forgot.  The secondary bailouts went directly to unions.

    The cool thing about the GM bailout is that banks and unions were both taken care of at once, a true win-win.

  • avatar
    bomberpete

    While I still don’t see the long-term harm to GM, it’s easy to understand why Big Eddie wants to bail out now while the bailing is good.

  • avatar

    Question: is GM taking in more money than it spends?

  • avatar

    Ed, you do get that this is a goofy artifact of the accounting rules, not some secret GM fraud, right? Pinning this on old GM culture is kind of disingenuous when CFO Chris Liddell is pretty much the antithesis of a short-sighted GM lifer, and has been nothing but blunt and direct in his dealings with analysts and the media.

    You can love the company or hate it — the sensible position is probably some of both — but at least at the C-level, it ain’t the same old GM.


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