Is General Motors Going Bankrupt?

General Motors [[gm]] shares closed down a dollar thirty eight today, sending the stock to fifty three year lows. Moreover, the company’s market capitalization is now only $6.43 billion and the price to sales is just .04. To put that in perspective, while yes the company is a big money loser, they still rang up 181 billion dollars in sales last year.

Unlike Chrysler which was taken private by Cerberus Capital Management in a $7.4 billion deal, a deal that happened because Daimler was tired of the bleeding and was actually willing to pay Cerberus to take Chrysler of their hands, GM is another beast altogether. It is way too much larger and unwieldy. Also, funding for very large PE deals have all but dried up, making getting the financing to buy GM might be almost impossible.

So if things get worse and GM is not able to secure funding via the capital markets, the only option might be a government bailout. In 1979, Chrysler was able to secure a federal subsidy which, while much was made of it at the time, was only about a billion dollars.

Things were different back then in a number of ways. Of note is that after getting the financing, Chrysler was also able to turn things around by bring aboard Lee Iacocca, putting out the K cars (Plymouth Reliant, Dodge Aries, Chrysler LeBaron) which were very successful and of course, introducing the mini-van. It will take a whole lot more to turn things around at GM even if they were able to improve their cash situation.

The financial markets are already treating GM paper as junk. It now costs about $3.175 million in upfront payments, plus $500,000 in annual premiums to insure ten million dollars of GM’s debt for five years. Why any one would pay half the value of the bonds to insure them is beyond us, but we digress. Additionally, GM bonds are selling for 61.5 cents on the dollar. This means it will become increasingly expensive for GM to raise money, assuming they can do it at all. That all adds up to make bankruptcy a strong possibility.

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Comment by michael

2009-05-03 19:22:13

is it wise to purchase a GM product at the moment. thank you

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