Is this take on GM's 100 -> 1 reverse split accurate?

[StageLeft]

Link

In a filing with the SEC late this afternoon it was disclosed that the GM "restructuring" would:

Increase the number of authorized shares to 62 billion (!)
Reduce the par value to one cent.
Effect a 100:1 reverse split for the existing shareholders.

Normally when a company reverse splits, they keep the market capitalization the same, so if you had 100 shares at $1.85/piece now they are worth $185/piece, you just own 1/100th as many.

However, in this case, if they do the 100:1 reverse for existing shareholders, but then also increase the number of shares elsewhere, it's akin to just wiping out their common stock and starting anew with a fresh IPO, kind of, isn't it? Hell if I know. Hence my post!

 

[Slew Foot]

I dont know how, but Im sure in one way shape or form us taxpayers are getting screwed over somehow.

 

[MotF Bane]

Somehow that sounds like the existing shareholders are getting fucked.

 

[MotF Bane]

Originally posted by: Slew Foot
I dont know how, but Im sure in one way shape or form us taxpayers are getting screwed over somehow.

That goes without saying.

*waits 40 seconds*
*still waiting*

 

[waggy]

Originally posted by: MotF Bane
Somehow that sounds like the existing shareholders are getting fucked.

thats what i was thinking. im sure its not though.

 

[StageLeft]

It kind of appears that Karl Denninger doesn't know how a reverse split works, since he said yesterday that the stock would be, with this approach, valued at under 2 cents. It's fallen today around 10% only, not 99%.

 

[sactoking]

From a VERY basic perspective, current shareholders will get screwed. Reverse split is 100:1, so share price goes from $1.85 to $185. Number of authorized shares changes from 2,000,000,000 (number as of 2008 FYE) to 20,000,000. Authorized shares then changes from 20,000,000 to 62,000,000,000, a change of 3100:1. Share price drops from $185 to $0.0597.

 

[conehead433]

Reverse split, smitt, shit, whatever - the point is moot. If the company files for bankruptcy common shareholders' stocks are worth zero. If you were attempting to make money on this POS stock get the hell out now.

 

[Thump553]

Skoorb: You are correct, that is how a reverse split works (or a split for that matter). For example, if you own 100 shares of XXX presently at $2.00 each and there is a 100:1 reverse split, you will end up owning 1 share worth $200. The total value of your XXX holdings doesn't change, just the number of shares.

Reverse splits are done for a number of reasons, most common of which are (1) some exchanges have delisting rules when the stock fall belows a certain value (I believe this is $1.00 per share on the NYSE), (2) buyers of stock have a psychological barrier against buying very low priced stocks, equating them with risky penny stocks and (3) probably most importantly, many mutual funds and the like have rules against buying shares worth below $X (frequently $5)-so their customers know that their mutual fund isn't investing in risky penny stocks.

I haven't read the GM plan, but from what I've heard the current shareholders will end up owning 1% of the company when all the dust settles. Assuming this is true why the stock price hasn't collapsed more mystifies me. I guess the difference between one percent and zero (probable result to common shareholders in a BK filing) keeps them motivated.

BTW, ignore par value. It is basically meaningless, a technical term. Most shares these days are no par value.

 

[sactoking]

Originally posted by: Thump553
BTW, ignore par value. It is basically meaningless, a technical term. Most shares these days are no par value.

Par value isn't really "meaningless". Most people think that investing in stock limits liability to what you invest. In other words, if you put $1000 into GM the worst that can happen is that you lose your $1000. Creditors have no recourse against equity holders. That's not 100% true.

Technically, equity investors are liable for their equity value OR the par value of their stock, whichever is greater.

The par value of GM as of FYE 2008 was about $1.67. If you happened to purchase $1000 worth of stock at $1.25, you'd have 800 shares. If GM went bankrupt, you would be legally responsible for $1336 (800 * $1.67). Yes, you could be required to pay an additional $336 on top of losing your $1000.

As an investor, you need to be cognizant of the stock's par value. Most publicly traded corporations list par value at close to $0.01 per share. Not all do. If your stock devalues precipitously, you could find yourself 'upside-down' in par value and potentially owing more than you think. Also, many closely-held companies value par considerably higher. It's always a bit more risky investing in closely-held companies just for this reason alone.

Edited for spelling

 

[StageLeft]

Originally posted by: sactoking
From a VERY basic perspective, current shareholders will get screwed. Reverse split is 100:1, so share price goes from $1.85 to $185. Number of authorized shares changes from 2,000,000,000 (number as of 2008 FYE) to 20,000,000. Authorized shares then changes from 20,000,000 to 62,000,000,000, a change of 3100:1. Share price drops from $185 to $0.0597.

HAHA, damn that is just rude!!!

I wasn't trying to make any money on GM, the stock is bad. I bought some citi at around $1.85, but have kept dicking around so much (now almost $4) that I've not made any. I am terrible, which is why I'm only doing this with tiny amounts of money!

 

[Thump553]

sactoking: Par value is determined when the stock is first issued and authorized. Par value doesn't thereafter change. For bonds and preferred stock, par is meaningful, but that is not what we are talking about here. I think you may be confusing market value with par value. Where are you getting the $1.67 par value for GM stock from?

I won't say it's impossible, but the only par values I've ever seen on any common stock (pubically traded or not) are either one cent or zero (no par value).

 

[sactoking]

Originally posted by: Thump553
sactoking: Par value is determined when the stock is first issued and authorized. Par value doesn't thereafter change. For bonds and preferred stock, par is meaningful, but that is not what we are talking about here. I think you may be confusing market value with par value. Where are you getting the $1.67 par value for GM stock from?

I won't say it's impossible, but the only par values I've ever seen on any common stock (pubically traded or not) are either one cent or zero (no par value).

GM 2008 10K (Careful, it loads painfully slowly)

Common Stock, $1 2/3 par value

Basically, if market price < par value, you're liable for the par value not the market price. Par doesn't change, and is usually considered a price "floor", but market can drop below par in some circumstances, like we see here.

 

[BoberFett]

It would seem to make sense though in the case of a split or reverse split that such a value should be recalculated. If it doesn't, that seems like a scam just waiting to happen.

 

[simpletron]

there are currently ~611M shares outstanding. GM is going to first issue ~60,500M shares, so the total outstanding share goes to ~61,100M shares or about 100 times as much as before. thus the share price then drops to ~.0185/share assuming constant market capitalization. then GM is going to 100:1 reverse split those shares so the price goes back to about where it was, but all existing shareholders own one hundredth the number of shares.

basically think of it this way - if you are an actual shareholder then for every 100 shares you currently own, you are actually giving away 51 shares to the government, 38 shares to the UAW/VEBA, 10 shares to the bond holders and keeping 1 share for yourself without the share price changing and the company dropping a lot of debt.

reference:
GM's PRE 14C SEC filing

pages 8, 9

Share Issuances and Implementation of the Charter Amendments

If the U.S. Treasury Debt Conversion, the Exchange Offers and the VEBA modifications described above (collectively, the ?Restructuring Transactions?) are consummated, we will issue an aggregate of up to approximately 60 billion shares of GM common stock (the ?New Shares?), subject to adjustment for the Reverse Stock Split, to the U.S. Treasury, the New VEBA and the holders of GM Public Debt tendered in the Exchange Offers. The exact number of New Shares will depend on the terms of agreements that we may reach with respect to the U.S. Treasury Debt Conversion and the VEBA modifications, and the level of participation in the Exchange Offers.

Blah, blah, blah,...

Very Substantial Dilution to Existing Stockholders

The Restructuring Transactions will cause very substantial dilution to existing holders of GM common stock. As of March 31, 2009, there were 610,505,273 shares of GM common stock outstanding. Assuming full participation in the Exchange Offers, the aggregate amount of GM common stock issued in connection with the Exchange Offers will be approximately 6.1 billion shares, which, based on the number of shares of GM common stock outstanding as of March 31, 2009, would represent approximately 10% of the pro forma outstanding GM common stock; the aggregate amount of GM common stock issued to the U.S. Treasury (or its designee) pursuant to the U.S. Treasury Debt Conversion and to the New VEBA pursuant to the VEBA modifications will be approximately 54.4 billion shares, which would represent approximately 89% of the pro forma outstanding GM common stock, with the final allocation between the U.S. Treasury (or its designee) and the New VEBA to be determined in the future (however, as a condition to closing the Exchange Offers, subject to the overall limit of approximately 89% of the pro forma outstanding GM common stock to be issued to the U.S. Treasury (or its designee) and the New VEBA in the aggregate, the U.S. Treasury (or its designee) will hold at least 50% of the pro forma outstanding GM common stock); and existing GM common stockholders would hold approximately 1% of the pro forma outstanding GM common stock. We determined the foregoing GM common stock allocations following discussions with the U.S. Treasury where the U.S. Treasury indicated that it would not be supportive of higher allocations to the holders of GM Public Debt or to the existing GM common stockholders

 

[Firebot]

So this is a good time to buy?

 

[sactoking]

So, in reading this it would appear as though Karl Denninger was right: when it's all said and done the shareholders will be left with <$0.02 for every share they owned and will have absolutely no say in the governance of the company.

Well played, federal government and unions, well played....

 

[ebaycj]

Originally posted by: waggy

Originally posted by: MotF Bane
Somehow that sounds like the existing shareholders are getting fucked.

thats what i was thinking. im sure its not though.

Actually that is exactly what it is.


Let's say old shareholders had 100 out of 100 shares of equity in the company.

The company does a reverse split, now there are only 10 shares and the old shareholders still have all 10 shares. This is fine in and of itself.

The company then issues 90 shares of new stock to bring the total back to 100 shares. However, now the "old" shareholders still only own 10 shares, so they now only have a 10% stake (as opposed to their previous 100% stake).

So yes, the "old" shareholders are getting screwed.