GM fact of the day

by on December 24, 2008 at 11:16 am in Data Source | Permalink

As Mark Steyn pointed out on NRO, GM now has a market valuation about a third of Bed, Bath and Beyond.

Here is the link.  The Steyn article also offers this:

GM has 96,000 employees but provides health benefits to a million people.

1 E. Barandiaran December 24, 2008 at 11:21 am

Tyler, I’d like to read your comments on this Lucas’ opinion on monetary policy
http://online.wsj.com/article/SB122999959052129273.html

2 Raționalitate December 24, 2008 at 11:39 am

GM is also worth 10% of Apple’s cash on hand

3 Patrick December 24, 2008 at 11:42 am

Even better, let’s convert GM into our new national healthcare system.

4 Bernard Yomtov December 24, 2008 at 12:12 pm

Please tell me that we’re not calculating the value of a firm as the value of its equity. That would be more than a little sloppy.

Indeed. also note Steyn’s claim that

Ford, Chrysler and GM make a loss of between $500 and $1,500. That’s to say, they lose money on every vehicle they sell.

Please tell me he’s not just dividing losses by unit sales and turning that into a per-vehicle figure. That would also be more than a little sloppy.

Then there’s this lovely thought:

The UAW is the AARP in an Edsel: It has three times as many retirees and widows as “workers† (I use the term loosely)

Right. Use the term loosely. As if Steyn has any idea of factory work, and as if his “work” is anything other than spewing out pre-approved right-wing gibberish in as nasty a tone as he can imagine. The guy sweeping the floor at a GM plant is doing something more constructive and useful than Steyn.

5 thehova December 24, 2008 at 12:22 pm

“Please tell me that we’re not calculating the value of a firm as the value of its equity. That would be more than a little sloppy.”

hmmm, I’m no financial expert.

But isn’t the value of GM’s equity the best big picture understanding of their situation.

6 Ian D-B December 24, 2008 at 12:46 pm

No, the value of its equity is not the best big picture understanding of their situation. The best understanding would come from the value of the entire firm. That is, we want to know the value of both equity and debt. While I’m sure that GM’s debt is selling for well below face value, it’s debt is still worth many multiples of BBBY.

At this point, the equity is all option value — the value of GM’s assets is less than its liabilities. But the value of its assets is still far more than that of BBBY (as of 9/30, GM’s cash on hand was worth more than all of BBBY).

Also, saying GM is worth less than Apple’s cash on hand is similarly silly, since GM is worth far less than its own cash on hand.

7 Silas Barta December 24, 2008 at 12:46 pm

So the ratio

number of people receiving health benefits from GM
to
number of employees

is over 100! GM better start hiring lots more people to bring that number down.

Malcom Gladwell, is that you?

8 8 December 24, 2008 at 12:56 pm

If they go out of business, they lose $0 per car.

They don’t lose money on every car they sell, in the sense that their trucks and SUVs earn tidy profits based on direct costs. But since their healthcare costs are spread across the company, they are losing money by simply existing. The model is unsustainable and bankruptcy is the solution.

9 Anonymous December 24, 2008 at 1:16 pm

Sometime in the next 90 (or possibly 60) days, GM’s market capitalization will fall below that of a warehouse full of specially-marked boxes of Froot Loops cereal. Common shareholders get wiped, bondholders take a substantial haircut, and cross your fingers and hope for the best going forward after that.

10 Alan Brown December 24, 2008 at 1:48 pm

Companies (and countries) need to pay as you go when it comes to benefits so that after work is performed, there is no cost lingering around for ever that future work must cover. If you provide an hours worth of work, you get a certain amount of health coverage and a certain amount of retirement pay. End of transaction.

The country has the same problem. Massive obligations building up but could have been avoided by basing benefits for people born during a particular year solely on contributions of the same people.

BTW, I would love to be able to comment on other comments right where they’re posted rather than at the bottom.

11 Curt Fischer December 24, 2008 at 3:56 pm

Scenario A: I raise $80 in capital from investors and then borrow $20 from the bank.
Scenario B: I raise $20 in capital from investors and then borrow $80 from the bank.

I have several problems with this hypothetical. The first we don’t have any information at all, not even a guess, on the business’s future earnings. Let’s say the earnings were zero, as in the company never made any money and never lost it either. In that case, and barring bankruptcy, the company in Scenario A is worth -$20, which is what the investors would need to pay the bank, and the company in Scenario B is worth -$80. So A is indeed worth four times as much in this case. Low debt loads make a company worth more when it has low or negative earnings.

Second, suppose the business had really high earnings, say, $180 per year. The investors in Scenario A pay back the bank and have $160 left to divide amongst themselves, which given their $80 initial investment, provides a 2x return. In Scenario B, the investors pay back the bank its $80 and keep $100 for themselves, giving them a 5x return on investment. High debt loads make a company worth more when it has high earnings.

This, of course, is called “leverage”. Right now, car companies don’t have a lot of earnings, so I would put them in the first category. If anything, all their debt detracts from their NPV.

12 Bernard Yomtov December 24, 2008 at 4:15 pm

Curt,

If the business goes broke neither shareholders nor lenders get anything back. The shareholders do not have to pay off the debt. Both the equity and the debt is worthless. The company is worth zero.

If the business has $180 then in scenario A the equity is worth $160, the debt $20. In scenario B the equity is worth $100, the debt $80. In both cases total value is $180, as you would expect. Leverage does not change the value of the firm. It changes how that value is distributed between shareholders and lenders.

13 MM December 24, 2008 at 5:33 pm

” As if Steyn has any idea of factory work, and as if his “work” is anything other than spewing out pre-approved right-wing gibberish in as nasty a tone as he can imagine. The guy sweeping the floor at a GM plant is doing something more constructive and useful than Steyn.”

The guy sweeping the floor at a GM plant does something more constructive than the legions of left-winger pre-approved-gibberish-spewers on DailyKos, HuffPo and elsewhere, too, all of which do so in as nasty a tone as possible so as to pander to their audiences, who are, obviously, left-wing pre-approved-gibberish-spewers who want to hear only their pre-approved gibberish in as nasty as tone as possible.

It never ceases to amaze me how often only the conservative side of the equation is bashed.

14 Anonymous December 24, 2008 at 6:08 pm

Yet another reason to institute universal health care.

15 assman December 24, 2008 at 11:31 pm

“I wonder how many pensions they are paying. The auto industry has re-discovered that private pension plans punish efficiency.”

I don’t agree. Depends how the pensions are setup. If the company properly funds the pension, make fairly conservative assumptions about asset growth (GM assumes assets will grow at 9%!) and it is defined contribution instead of defined benefit then I see no problems. In fact I would say that even a defined benefit plan can be made to work as long as it is well-managed. But this is all theoretical. In the real world perhaps pensions systems really don’t work because people in power have too much incentive to raid them. This goes for public and private pensions. GM is no different than the US government.

I think the best solution is the Canadian CPP/OTPP solution. Create an independent organization to handle pensions.

The United States should adopt this solution with Social Security. To create Al Gore lockbox, create an independent institution analogous to the Federal Reserve to invest the Social Security surplus. This would solve the primary problem with Social Security.

16 mm December 25, 2008 at 10:38 am

Yes company A is worth 4 times as much as company B.

Even easier. If company A borrows $100 from the band and buys a 100 dollar bill with it this company is worth zero (100[assets]-100[liabilities]=0). If company B raises $100 and buys a 100 dollar bill with it this company is worth $100 (100-0=100). company B is worth infinitely more then company A. The shareholder isn’t any better off, but the company is.

17 Barbar December 25, 2008 at 3:08 pm

MM, the company isn’t worth $100 in the second case, *equity* in the company is worth $100. The whole point is that equity value is not the final measure of a company’s worth.

Put it another way. Say you have a car company with zero debt and $100 of equity value, and a retailer with zero debt and $60 worth of equity. Which company is worth more? Obviously the car company. Now the car company borrows $50 to buy back $50 worth of shares. Now it has $50 of debt and $50 of equity. Is it suddenly not as viable as the retailer? This would be a very strange claim; the car company’s business model hasn’t really changed, has it?

18 PaulBlart March 10, 2011 at 2:48 pm

Just finished browsing the Des Moines auto repair website when I found your article here. This issue has been discussed again and again. General Motors employees are paid as they should be for the job they have. They are not paid astronomical salaries. Do not worry.

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