Stripping GM for Parts?
Rumor alert – Silicon Valley Billionaires and VCs eye GM for parts…
(Menlo Park, CA) Combine a moribund IPO, housing, and startup market with idle capital and a large asset-laden American institution like General Motors valued at ONLY $1.3 Billion dollars and you have a recipe for something interesting. Rumors have started to float around the valley, an area populated by many people who could, themselves, buy GM out of their own bank accounts, that GM may make sense as an Icahn style break-up play with some technology leftover to add auto-innovation to the Silicon Valley start-up playbook.
Elon Musk, Chairman of electric car company Tesla Motors, could buy GM outright from his personal fortune but he doesn’t need to go it alone. VCs sitting on large investment pools of unproductive capital (for which they have received strong criticism as of late) also are looking to do something.
So what is the idea that is floating around? Simply put GM, according to one back-of-the-envelope calculation, has assets worth well over $12 billion in a combination of technology, patents, and raw materials. A series of investors have toyed with the idea of a hostile takeover and an immediate Chapter 7 bankruptcy filing. That would effectively eliminate all the debt and union contracts leaving just the assets. At an estimated cost of $500 million for the filling, legal clean-up and unproductive asset sales added to the current market cap of $1.33 billion plus a 50% purchase premium the total bill is $2.5 Billion. In just asset value that leads to an almost 500% ROI on a very large investment base. It has been at least 4 years since Silicon Valley has seen such a return and never on such a large investment base.
To add to the attractiveness of this deal is the fact that the engine of Silicon Valley could cherry-pick and parlay the technology/patent assets of GM into many start-ups that could truly unlock their value and return much more than the $10 billion the initial sell-off would provide. Some estimates put the lifetime value of those assets used to seed start-ups at $50 billion. All of this just requires some risk-taking and vision, two assets found in abundance in the valley.
See more posts on the GM bailout.
This entry was posted on April 27, 2009 at 7:37 am and is filed under Stories with tags American auto industry, auto industry, Elon Musk, General Motors, GM, Menlo Park, Silicon Valley, Tesla Motors, Venture Capital. You can follow any responses to this entry through the RSS 2.0 feed You can leave a response, or trackback from your own site.
April 28, 2009 at 3:53 pm
This sounds like a good idea, however, I have a question. Any investor who pays into a fund to purchase GM will loose their equity when chapter 7 is filed. Then the public at large will get to bid on the assets. The investors would have to bid on the assets with everyone else. As a result, the investors in the original purchase and liquidation would be (effectively) paying above market rates for the assets. How is this possible to still make money?
April 28, 2009 at 8:05 am
Thanks for your reply, Marc.
When I referred to liabilities, I was not referring to GM’s corporate debt or any other obligations it may have as a company,….I was referring to the carrying costs of the physical assets: property taxes, maintainance, insurance, security, utilities, ect on the physical plants(buildings and grounds), and rapdily-depreciating inventory of unsold cars (as well as possible taxes on inventory) – all without generating a dime in revenue.
I have to wonder what methods the investors are using to arrive at the value of GM’s assets. Assets, like anything else, are only worth what someone is willing to pay for them. $12 billion in assets – that may well
have sold at or near $12b 2 or 3 years ago, may in fact, only be worth a
fraction of that price now. Or are we talking what *was*, say, $50b in assets now worth only $12b at fire-sale prices? In THAT case, $2.5b might be a bargain if they can get buyers lined up for the dismembered assets ahead of time.
April 28, 2009 at 12:19 pm
Actually what I found interesting was the notion of being able to cherry-pick and grow some of the key intellectual property assets. For me (as a Silicon Valley person myself) that is what is really intriguing. I believe there must be some really cool technology that could be taken, developed and licensed to EVERY car company (or other manufacturing company) on the planet that could potentially make it more valuable than the company in it current form. Additionally there may be some manufacturing process innovations that could also be licensed to every manufacturing concern on the planet leading to not only great value for the new owner but a greater value for society as a whole.
Its like cotton. You need to burn the cotton field for the cotten to come out. Or in general like any forest. New life can often only emerge if you burn the old infrastructure.
Thanks for the invigorating conversation. At the end of the day this is what this blog is about. Its not about being nasty or snarky but about being challenging and forcing the really good ideas to come out through spirited (and hopefully professional) debate.
April 28, 2009 at 3:00 am
“the total bill is $2.5 Billion. In just asset value that leads to an almost 500% ROI on a very large investment base.”
Wow, that’s a tad optomistic!;-) Talk about counting one’s chickens before they hatch! I don’t see how anyone could use the term “ROI” in this case. Not in this economy. A ROI would mean an actual profit, in which case they’d need to find an actual buyer for GM’s assets that’s willing and able to pay 5X(or whatever X) what these would-be investors plan on paying for it.
And failing that, GM’s assets can quickly turn into liabilities for anyone stuck with them. Nobody is going to want to rent the buildings, and no one is going to be able to (or want to, if in their right mind) try and run the factory to produce cars that few want and even fewer can afford to buy. Honda’s sales are down 71% – if what is argueably one of the best carmakerw on earth is having that kind of trouble, it’s obvious GM’s prospects as a viable car manufacturer are grim, indeed, if not dire.
I can buy a $100k home for $10-15k right now, but unless I manage to sell said home for whatever X I paid for it, there is no ROI, save perhaps the long-term possibility that prices will recover somewhat, but with inflated, debased currency, even that won’t mean much. Oh, well, at least I can rent out the home for some cash flow.
Soeren (aka ReallyFuckedRenter)
April 28, 2009 at 6:33 am
The problem is that GMs market cap is so low because of the liabilities but that is why you declare Chapter 7 (liquidation) or Chapter 11 (bankruptcy). In either case the liabilities go away (with the exception of filing, some legal and selling costs as mentioned). In Chapter 11 you restructure those liabilities so you can survive when you emerge. In Chapter 7 you never plan to emerge so those liabilities are wiped out and you are left with the assets (and yes there will be some carrying costs of those assets). So what this article asserts is that even in this reduced state the assets are still worth 12.5 billion (before considering the long-term value of the intellectual property). The way to look at your house analogy is if it came with the artwork and the furniture. You could destroy the house for a small cost so you just have to mow the lawn on the remaining land (reduce the carrying costs). Before you do that you could sell the artwork and furniture for more than 15k (assuming it was nice furniture but in this case that is the assumption). You would never have to sell the house, just its parts and some costs to reduce the carrying costs because you couldn’t sell the original asset.