SEC Filing: GM Wipes Out Stockholders

Robert Farago
by Robert Farago
sec filing gm wipes out stockholders

General Motors has filed papers with the Securities and Exchange Commission detailing plans for financing the new, “good” GM. If/when realized, the scheme will wipe out GM’s current stock holders. The plan would:

* Increase the number of authorized shares to 62 billion

* Reduce the par value to one cent

* Effect a 100:1 reverse split for the existing shareholders (that’s one cent on a dollar)

It’s the latter that says sayonara to anyone who owns shares in the current “bad” GM, as Reuters reports.

Once GM has issued new shares to pay off its debt to the U.S. government, bondholders and its major union, it said it would then undertake a 1-for-100 reverse stock split.

Such a move would take the nominal value of the stock back to near where it had been before the flood of new shares. But in the process, GM’s existing shareholders would see their stake in the 100-year-old automaker all but wiped out.

Meanwhile, debt holders and bondholders get well and truly stiffed. I mean, they get to “forgive” GM’s mountainous debt in exchange for a stake in the new, more handsome zombie automaker.

GM has asked its three major creditor groups to write off at least $43 billion in debt in exchange for ownership of a restructured company.

By contrast, the current market value of GM’s current 610 million shares is about $1.7 billion.

GM bondholders, who are owed $27 billion, have also been offered new stock in exchange for writing off debt in a bond exchange the automaker launched last week.

The necessary non-Chapter 11 bankruptcy target for this transformation remains 90 percent. Oh, and the United Auto Workers (UAW) have to forgo their promised $10 billion health care trust fund payment—in exchange for stock in the new new new new new new GM.

The Presidential Task Force on Automobiles—for it is them pulling the strings— has a little over three weeks to get everyone (debt holders, UAW, the feds, GM) to agree to who gets what in the reconstituted American automaker.

Either that, or a federal bankruptcy judge will attempt to sort it out. While today’s decision by Judge Gonzalez to authorize Chrysler’s $2 billion sale of Chrysler’s good bits to new new Chrysler would seem to indicate a rapid conclusion in that arena, as Shakespeare said, there’s many a slip ’twixt the cup and the lip.

Meanwhile, look for GM’s stock price to evaporate. De-listing is only a matter of time.

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  • Ivyinvestor Ivyinvestor on May 06, 2009

    "...par value to one cent..." This sounds alarmist, but doesn't really mean anything, for those might've been concerned. While $0.01 is not exceedingly common for par issuance, any students of accounting know that there are three basic components of the journal entry for issuing common shares, and the par value can be anything - one pence, one dollar, ten dollars, 15, etc. It's the "paid in capital" line that matters here. Also, don't forget that a reverse split of 1:100 doesn't decrease the value of your holdings: if you own 1000 shares at $1 ($1000, total), you'd own 100 shares at $10 ($1000, total). Folks often forget the equivalence, not gain or loss, associated with splits. Of note is that, above $5, the shares will be available to most institutional investors again for shorting...(Unfortunately for longs, history has shown that, save for a few functional reverse splits, periods of heavy market pressure often result in continued hammering.)

  • Kevin Kevin on May 06, 2009

    The 1-100 stock split itself will not affect the value of GM or any shareholder's stake in GM. That's not the part that wipes them out. It is the massive super-dilution of issuing 60 billion new shares that will wipe out current shareholders. The reverse stock split will then just (in theory) keep the stocks price quote around the current level of $1.60 as opposed to 1.6 cents. In theory we'll end up with a company that still has 600 million shares outstanding trading at $1.60 ... but if you're a current shareholder you'll only have 1/100th the shares you now have. (At least that's what the news reports are attempting to explain, I didn't read the filing).

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