More Trouble Than I Thought at GM

Today's announcement that GM will sell 51% of their GMAC financing arm really brought home to me how bad things are at GM.  I haven't really followed the situation, but I had assumed that GM was facing the same type demographic bomb as the airlines, fat and underfunded pensions and retiree health care benefits promised when times were good and US auto makers didn't face much troubling competition.

Here is what I found interesting:  GMAC is reported to make about $2.5 - 3 billion a year in profits.  This might tend to imply a value of at least $25 to $30 billion, which is confirmed by the fact that GM just sold half for $14 billion.  But GM as a whole has a market cap of just under twelve billion.  This means that their entire manufacturing business is valued in the market at roughtly -$16 Billion.  Yes, negative sixteen billion.  Another way to look at this is that if instead of selling GMAC yesterday, GM had instead sold all of their automotive manufacturing, brands, designs, etc. to someone for $1, and became a pure financing business, GM shareholders would be richer by $16 billion, the equivilent of raising the current stock price from about $21 to about $49.

  • nick d

    If they just sold it for $14B, and GM's market cap is ~$11.5B, that implies a -$2.5B in value of assets. I would say GM is very, very ripe for a hostile takeover and corporate raid. The new owner would then turn around and sell off everything he could to get his cash back out of the organization. Who knows, maybe toyota or honda will be buying up the michigan factories soon.

  • nick d

    If they just sold it for $14B, and GM's market cap is ~$11.5B, that implies a -$2.5B in value of assets. I would say GM is very, very ripe for a hostile takeover and corporate raid. The new owner would then turn around and sell off everything he could to get his cash back out of the organization. Who knows, maybe toyota or honda will be buying up the michigan factories soon.

  • Ryan Cupples

    I am confused. It says that projected earnings are $14 billion, but that it was sold for $7.4 billion?

  • Doug G.

    GM's problems are numerous and very difficult to correct. They have lots of pension obligations that they can't easily get out of. They have allowed negotiations with unions to trump sound business decision making. They keep thousands of people on the payroll who either sit in a room all day doing nothing or go out and do community work that does not contribute to the company in any meaningful way (Google "GM workers idling" for Forbes article). They have been bad at marketing. They make unreliable vehicles compared to foreign brands. They make fuel-inefficient vehicles. They are investing/wasting a lot of money in ethanol-powered cars. There is a culture of entitlement among their employees.