By on May 6, 2009

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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20 Comments on “SEC Filing: GM Wipes Out Stockholders...”


  • avatar
    OldandSlow

    Penny stocks anyone? I wonder how many pension funds still own GM paper.

  • avatar
    mattstairs

    The Surfari’s song instantly comes to mind.

    Why is this stock still listed on the NYSE and still in the Dow 30?

  • avatar
    mikey

    I kinda’a think GM Canada’s hourly pension is partially invested in GM stock.I know the salary guys had a buy 2 get one free plan.Hopefully the smart ones bailed out.

  • avatar
    Luther

    WoooHooo – GM basically pulled a Robert Mugabe or a Gordon Brown! Send them a bunch of bananas. Off to the Pinksheets with GM!

  • avatar
    kristjan

    Matt,

    NYSE changed the capital requirement and daily price rules. That said I believe GM will be de-listed soon (June 1).

  • avatar
    mikey

    Thank you for putting the situation in layman terms RF.Me thinks our pension fund must be a giant Ponzi scheme.

    Personally,I can’t see the Chrysler plan working for Chrysler.So there is no way it will work for GM

  • avatar
    Redbarchetta

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

    What I don’t understand is why are people still buying into that stock. It’s gone up in that last week, that’s insanity. It should have been de-listed months ago.

  • avatar
    NBK-Boston

    This isn’t new news — it’s at least a week old. The GM bondholder swap proposal document contained mention of the 100:1 reverse split, and on April 28 I highlighted this in a comment I made:

    One little-reported element of the GM proposal (225 shares of GM stock per $1000 of bonds exchanged) is that there is a 100 to 1 reverse stock split set to take place immediately after all this, with fractional shares rounded away from bondholders, but purchased for cash from existing stockholders. As they state explicitly in the fine print somewhere, someone with just $1000 in GM bonds would get 225 shares of stock, but then that would be immediately converted to 2.25 shares of new stock, which would then see 0.25 shares shaved off, leaving the holder with exactly 2 shares.

  • avatar
    GS650G

    We are nearing the end of the GMDW series.

  • avatar
    John Horner

    What is really strange is that some fools are paying $1.58/share for GM stock today.

    “Why is this stock still listed on the NYSE and still in the Dow 30”

    Good question. The day for Dow Jones to replace GM with another actual real live viable Industrial company in the DJIA is overdue. Wikipedia has a good article on the nuts and bolts of this widely followed index:

    http://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average

  • avatar
    paris-dakar

    That’ll show them. Those profit seeking investors, getting exactly what they deserve.

  • avatar
    MikeInCanada

    Re Redbarchetta :

    There is a fair amount of covering short positions and day trading going on in GM shares right now.

    If you shorted the stock, well now is the time that you got to get some shares and cover you position.

    As far as day trading is concerned – it’s like picking up pennies while in front of a slow moving bulldozer. All it takes is one small lurch forward and you’re crushed.

    I’ll stick with my long lost father’s (Warren Buffet) advice.

  • avatar
    Redbarchetta

    I guess there is profit to be made of even the worst situation. I just assumed the shorting and day trading wouldn’t cause the price to jump 6-8-10% in a day, but what do I know. I only invest in what I know and can understand, which tells me to stay the hell away from them. Down 8% so far.

    I only wish I had bought Ford stock when it was at $1.50. They have been making steady gains since the bankruptcy twins have been all in the news.

  • avatar
    thalter

    This actually isn’t as bad of a deal debt holders as it would seem.

    One of the main reasons that GM’s stock and market cap is so low is precisely because of the mountains of debt the company is carrying – Equal to or greater than the value of most of its assets. Take the debt off the books, and the balance sheet begins to look a lot better. The shares that the debt holders receive should rise in value on this basis alone.

    Now the existing shareholders, they are still screwed in this deal.

  • avatar
    MikeInCanada

    Redbarchetta :

    What we’re seeing here is the rule of small numbers. At these low valuations, changes of even a couple of cents make for large % changes.

    GM stock is typical of (former) Blue Chip equities in as much as most of the stock is held by institutional investors. Even today, 47% is still owned by institutions – and they’ve just pretty much written off the stock; why bother trying to sell it. When factoring in the actual transaction cost to sell 5-10 million shares, it’s probably not worth it.

    Avg trading volume is approx 38 million shares (out of 610 million). That’s just approx 6 %. Again, the rule of small numbers comes into play and things look more valuable then they really are – and everyone knows it.

    Just wait. If one of the big stock holders now tries to sell out, the price will just implode.

  • avatar
    Pch101

    There is a fair amount of covering short positions and day trading going on in GM shares right now.

    That sounds like a plausible explanation for rising prices. On the fundamentals, it makes no sense, obviously, but that has been true for a long time.

    That said I believe GM will be de-listed soon

    It sounds as if the current stock will be replaced by these new shares. That probably means that there will be a new stock with a different ticker symbol. Let’s hope that someone has the good sense to see that this new stock isn’t a Dow component.

    The reverse split is meant to inflate the per-share price. Of course, the share price is not going to just increase by 100 times, because the existing shareholders are going to be massively diluted.

    We’ll see what happens, but the share price may end up at somewhere around $10 or so, which would be as good as saying that the current shares will end up at an effective price of 10 cents. For many of the old line shareholders, that’s as good as it going to zero.

  • avatar
    Zammy

    Can someone explain how this is compatible with the board’s fiduciary duty to shareholders? I don’t see how this is possibly in the interest of existing stock holders.

  • avatar

    6 “new”s is the absolute perfect number to go in front of “GM,” for now. Good choice.

  • avatar
    ivyinvestor

    “…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.)

  • avatar
    Kevin

    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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