Why the U.S. Should Hold Its GM Stake

GM’s management has done a lot to badly cripple the company recently. Now, with its stock price down at least in part because of poor management decisions, GM wants the government to sell the shares it holds in the world’s No.1 car company

The Wall Street Journal reports that the U.S. holds 500 million shares in GM (NYSE: GM). The manufacturer might buy some of the shares itself, if Treasury would agree and the balance of shares would be disposed of in an IPO. The dilution from the IPO would likely push shares even lower

The Journal points out that if the stock is sold at the current price of about $24, it would trigger a loss of $15 billion. Shares would need to rise to $53 for Treasury to get its money back. GM’s shares reached almost $40 in early 2011.

GM’s CEO Daniel F. Akerson has been widely criticized for two things. The first has to do with GM’s ongoing losses at its Europe operations — Opel and Vauxhall. GM lost $341 million in Europe in the second quarter and, on an annual basis has lost money since 2000 which at this point totals $12 billion. There is no end in site for the losses. GM has bled market share in Europe. The company’s market share in the region was 8.4% in the second quarter, down from 8.8% the quarter before. The market remains dominated by VW, BMW and Daimler, PSA Group and Renault Group. GM has far too much capacity in a region troubled by recession in which it has nearly no hope of gaining back share. The U.S. company has to threaten both unions and several European governments that it is prepared to abandon the market, although some analysts believe that GM would have to pay billions in pension obligations and severance to do so.

The second problem GM has not been able to solve is that its U.S. sales have flagged. Toyota (NYSE: TM), pushed part way out of the market by recalls and slow production due to the Japanese earthquake, has roared back. GM’s U.S. market share through eight months last year was 20%. That was down to 18.1% through the same period this year. GM’s products have not been good enough to keep sales moving up as fast as the market in general.

GM needs to show the government, and its other investors, that it has a means to get its shares back to $30, before there is any discussion about $40 or $50. Treasury can wait GM out until Akerson retires or is fired and a new management team gets a shot at improving the firm’s earnings.

Douglas A. McIntyre