Monday, April 27, 2009

The Future for GM Shareholders

Today, the Federal Government announced the latest version of the GM bailout plan. A small note in this version has GM retaining the GMC division and shedding Pontiac, which is a much better idea than the original proposal that would have sent GMC into a "bad company," along with Saturn. So somewhere in the discussion, the Administration learned something about GM's light truck business and the value of the GMC nameplate and products.

The proposed exchange offer would have bondholders getting $0.38 on a dollar versus versus $0.10 that is reflected in the secondary markets for the bonds; however, according to the Wall Street Journal and Morgan Keegan, they would get only a 10% interest in GM after the restructuring.

What's more troubling is the fact that the Government will be a much larger equity holder than in earlier proposals. The role of independent trustee directors who represent the taxpayers has always been without precedence and legal guidance. Legitimate questions are raised about the objectives of these independent trustees. It seems reasonable that their minimal duties should be to ensure that the taxpayer injections of funds are repaid, and that they company is run to generate a commensurate return without taking undue risks. Now, however, comes the inevitable discussion from observers like Robert Reich that these directors should have other, broader social objectives.

Finally, I wouldn't be surprised to see proxy access proposals coming from minority shareholders like the UAW to achieve their own ends. Would the government's trustee directors owe loyalty to proposals from politically-motivated minority shareholders? I suspect there would be pressure on them to be beholden to special interests like these.

So, where would that leave an institutional shareholder? In the short-run, there may be a quick trade for hedge funds in the shares, if the economy is beginning to turn. However, this plan will have unintended consequences that are not visible yet to downstream players like the parts suppliers and the surviving dealer network.

I would guess that the most bullish analysts would rate GM shares a "Hold."

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