Bill Canis
Specialist in Industrial Organization and Business
Baird Webel
Specialist in Financial Economics
General Motors Corporation (Old GM) was a publicly traded company from 1916 until its bankruptcy in 2009. As part of restructuring, Old GM and its successor General Motors Company (New GM) together received over $50 billion in federal assistance through the U.S. government’s Troubled Asset Relief Program (TARP). In exchange for this financial support, the U.S. Treasury received 60.8% of the new company, with the rest of New GM held by the United Auto Workers (UAW) retiree health care trust fund, the governments of Canada and Ontario, and holders of Old GM’s bonds. In its restructuring, GM closed plants, cut its hourly and salaried workforce, shed three brands, reduced debt, introduced popular new vehicles, and implemented changes in retiree legacy costs that had been a major financial drain.
In November 2010, New GM conducted an initial public offering (IPO) of stock to investors, once again becoming a publicly traded company, although the post-bankruptcy owners, including the U.S. government, continue to hold significant stakes in the company. In the IPO, 550 million common shares were sold by GM shareholders at a market price of $33 a share, raising over $18 billion. The U.S. Treasury sold over 412 million shares in the IPO and received approximately $13.5 billion from its sale of shares. In addition, it continues to own 32% of New GM’s common stock. The only capital New GM itself raised through the IPO was $4.9 billion from the simultaneous sale of preferred stock.
GM is not the only company that received TARP funds as a result of the 2008-2009 financial crisis. More than 700 institutions received support, with the U.S. government taking ownership stakes in five large companies: GM, Chrysler, GMAC (now called Ally Financial), AIG, and Citigroup. In general, ownership of private companies was not a goal of TARP and the U.S. government has sought to reduce its ownership stakes when possible while maximizing the taxpayers’ return from the assistance.
The strength of New GM’s stock price, and the related recoupment of government assistance to the company, have hinged on two major factors: the success of GM’s restructuring and the performance of the global economy, including retail auto sales. New GM’s finances have improved markedly since emerging from bankruptcy, and the company has achieved 10 consecutive quarters of profitability. The global economy’s prospects, however, have become clouded, especially in Europe. The prospects of slow growth there and in China (GM has large operations in both regions) have prompted many investors to avoid some major automakers, including New GM, Ford, and Daimler (parent of Mercedes-Benz). The shares of these three automakers have all dropped by a third or more since the summer of 2011, while the Dow Jones Industrial Average has risen by over 25% during the same period.
With the IPO sale of some of its New GM shares in November 2010, the U.S. government realized a $4.4 billion loss on these shares. Future sale of the remaining U.S. stake in GM could result in gains that would offset this loss. In order for the U.S. government to fully recoup the nominal value of its $50.2 billion assistance, however, the government’s shares would need to sell for over $52 per share, compared to the recent trading range of under $25 per share. It is unclear when the U.S. Treasury will sell additional shares in GM, given recent volatility in the stock market and the unsettled economic outlook.
Date of Report: September 7, 2012
Number of Pages: 18
Order Number: R41978
Price: $29.95
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