Monday, November 22, 2010

Confusion over General Motors Stock

With much fanfare, the new GM Company had an initial public offering (IPO) last week. Sadly, some shareholders of the old General Motors Corporation think that their old shares will be converted into the new GM shares that closed Friday at US$34.26 per share. This will not happen.

The old GM Corporation was renamed to the Motors Liquidation Company as part of its bankruptcy process. All the old GM stock was renamed MTLQQ. These shares closed on Friday at 18.46 US cents per share.

The Motors Liquidation Company sold its assets to the new GM Company. The ultimate value of the MTLQQ will be decided after the bickering among old GM’s creditors is done. This value is likely to be very low and will have nothing to do with the shares in the new GM Company.

So, in a couple of steps, General Motors Corporation has restored its name to the same initials. However, the old one was “Corporation” and the new one is “Company”. In the shuffle, the old shareholders are left with very little.

Don’t get me wrong, though. I think it’s appropriate for shareholders to lose everything when a company goes bankrupt. I just think it’s sad when naive shareholders hold out hope of getting their money back when it won’t happen.

8 comments:

  1. GMC is a division of General Motors, specializing in trucks, SUV's and crossovers. The only short form of General Motors, whether Corporation or Company, is GM. It is not known as GMC, and has never been known as GMC.

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  2. @Anonymous: OK, I've made my joke in a slightly different way. But, my point stands. Old GM failed as a company and destroyed investor capital. A new entity has emerged with almost the same name and this seems to paper-over the abject failure of the past as though it never happened.

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  3. Kind of off-topic, but I bought a small position in the new GM stock. I read in "You Can Be a Stock Market Genius" by Joel Greenblatt that buying government spinoffs almost always works out well because governments don't want to suffer the backlash of issuing shares and have prospective voters lose money on them. I imagine it must have been excruciatingly painful for Jim Flaherty and the Conservative party to announce the new taxes on income trusts.

    I figure I will hold GM for a year, then sell for a profit (can hope, anyway). It's a small position though, and I wouldn't want to hold a car company long term.

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  4. @Gene: That's an interesting theory. I wonder how much past data is available to back it up. In any case, I hope it works out for you. Personally, I'm not too optimistic about GM suddenly learning how to make cars as well as its best competitors.

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  5. Modern shareholders are lucky enough to limit losses to a 100% loss. Apparently when stock markets were in their infancy, there was no limit on shareholder liability. Shareholders were expected to make whole the debts of an insolvent company, even if that meant losing more than their investment.

    This is just from memory, so I might have the details wrong.

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  6. @Gene: Sounds painful. I remember hearing that Lloyd's used to (or still does) have unlimited personal liability for its members.

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  7. @Michael: There's nothing like laying off half the employees and driving their company stock to $0 to make them refocus. If anything makes GM suddenly start making great cars, this is it. If they've fired a lot of mediocre engineers and sales people, and the clueless managers and executives, GM could be a force to be reckoned with.

    I don't own any GM by the way, and I know very little about the particulars of GM. I've just seen what happens with a company employing a lot of smart engineers suddenly gets a fire lit under their toes. (This happened to Intel a few years back when AMD ate their lunch on the 64-bit computing front. Intel's response was very impressive from an engineering point of view.)

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  8. @Patrick: I'm not as optimistic about GM's future as you are, but I don't trust my gut feel. Whether GM succeeds or fails, I won't be holding any stock (except for a small slice in an ETF).

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