Part one of my interview on The Real News Network on the recent GM IPO is here: Obama GM Strategy a Lost Opportunity and part two is here. You can read my Research Note on the impact of the IPO on the GM/UAW VEBA here.
Austan Goolsbee tried defending the Government’s investment in GM with a simple argument on a White House “White Board” video recently here.
He makes two big points: one, GM is keeping jobs in America and Goolsbee’s map of the midwest indicates all the GM plants kept open. But he ignores the actual business model put forward by GM itself in its own prospectus reviewed by the SEC and provided to all investors in the IPO. There GM makes clear their business model is to expand mainly, not in the US where auto purchases have slowed, but in key emerging markets like Brazil and China.
To take advantage of low cost local labor in those markets they are expanding manufacturing capacity there much faster than in the US. GM said in its Prospectus:
We are a leading global automotive company. Our vision is to design, build and sell the world’s best vehicles….Our business is diversified across products and geographic markets, with operations and sales in over 120 countries. We assemble our passenger cars, crossover vehicles, light trucks, sport utility vehicles, vans and other vehicles in 71 assembly facilities worldwide and have 88 additional global manufacturing facilities. With a global network of over 21,000 independent dealers we meet the local sales and service needs of our retail and fleet customers….Approximately 72% of our and Old GM’s total 2009 vehicle sales volume was generated outside the United States, including 38.7% from emerging markets, such as Brazil, Russia, India and China (collectively BRIC), which have recently experienced the industry’s highest volume growth.
So, in fact, point one ought to be: if the US Treasury succeeded in anything with its GM “rescue” package it was to enable the global investment class to benefit from GM’s expansion outside the United States. That is why, for example, the IPO was underwritten by an unusual number of investment banks from outside the US including Banco Bradesco and Itau BBA of Brazil and China International Capital Corporation of Hong Kong.
Point two, he tries to defend the $50 billion of taxpayer money (a conservative estimate) dumped into the GM restructuring scheme. What does the Prospectus tell us (rounding off the numbers)?
1) UST (Treasury Department) invested 50 billion in GM and received a note, Series A Preferred Shares and Common Stock.
2) $7 billion of this amount was repaid prior to the IPO, including the full amount of the note, leaving $43 billion in GM just prior to the IPO.
3) UST sold shares of common stock worth $12 billion in the IPO, leaving $31 billion in GM after the IPO.
4) GM sold new “Series B” Preferred Shares in the IPO alongside the sale of the UST and VEBA shares. GM has promised to use $2 billion of the proceeds of the “Series B” Share sale to redeem the UST holdings of “Series A” Shares. If they do that the UST will have $29 billion still invested in GM.
But as of today, the market values GM at $50 billion yet the UST owns only a 33-6% share of the Common Stock of GM (depending on whether the bankers increase the size of the IPO which they can still do). So the current market value of the UST shares is only about 17 billion. Add that to the 19 billion in cash paid back and received in the IPO and you have 36 billion.
Which means…the 50 billion in cash we put in to GM is now worth some 28% less – $36 billion in cash and remaining stock not $50 billion!
To recoup the remaining $14 billion needed to make us whole would require the value of GM to nearly double so that the remaining 17 billion stake grows to $31 billion and the market conditions allow the UST to sell its remaining shares. In other words, GM would have to become a $90 billion dollar company not a fifty billion dollar company.
No one in their right mind would predict such an outcome any time soon. Back to the White Board, Austan!