Comments on: Stripping GM for Parts?

By: kd

kd — Tue, 28 Apr 2009 23:53:36 +0000

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?

By: marcitz

marcitz — Tue, 28 Apr 2009 20:19:04 +0000

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.

By: Soeren

Soeren — Tue, 28 Apr 2009 16:05:00 +0000

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.

By: marcitz

marcitz — Tue, 28 Apr 2009 14:33:28 +0000

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.

By: Soeren

Soeren — Tue, 28 Apr 2009 11:00:04 +0000

“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)