One thing to savor about Treasury’s plan to get out of GM is how many corporate-governance hot buttons it gently caresses. “GM will purchase 200 million shares of GM common stock from Treasury at $27.50 per share” translates into news reports as “Treasury is losing a bazillion dollars,” since after all Treasury paid rather more than $27.50 per share originally, but there are other ways to look at it. One is that Treasury seems to have agreed a deal with GM after the 12/18 close at $27.50 for a stock that had closed at $25.49 and hasn’t touched $27 in ten months; i.e. GM overpaid for stock from a favored/nudgy insider by $400mm. Normally, privately negotiated buybacks from favored shareholders at a premium to market prices are criticized. Normally, privately negotiated buybacks from nudgy, “ooh-don’t-buy-a-corporate-jet” activist shareholders are called greenmail.
That doesn’t mean such buybacks aren’t market-pleasing, by the way. Much like Buffett’s recent slightly-above-market buyback, GM’s above-market buyback seems to have boosted the stock. Delightfully part of the boost is accounting-related. From the Journal:
GM’s repurchase will be accretive to earnings per share, reducing the auto maker’s total shares outstanding by about 11%. GM expects to take a charge of approximately $400 million in the fourth quarter, which will be treated as a special item.
Got it? Getting rid of shares reduces shares outstanding and is accretive to EPS. It’s somewhat less accretive when you overpay for the shares by $400mm and that $400mm is a charge to income. But at least you can call it a special item.
While EPS accretion is nice, the 300mm shares that will be flooding the market are arguably not so nice for other shareholders in the near term. (Or perhaps they are?) That in turn is not so nice for the selling shareholder – the government – who would presumably have to sell at a discount to last trade, as it did when it sold AIG shares earlier this month. But the government may have a plan to minimize that friction:
Treasury intends to sell its other remaining 300.1 million shares through various means in an orderly fashion within the next 12-15 months, subject to market conditions. Treasury intends to begin its disposition of those 300.1 million common shares as soon as January 2013 pursuant to a pre-arranged written trading plan. The manner, amount, and timing of the sales under the plan are dependent upon a number of factors.
Hee hee hee. To avoid getting picked off by the market, Treasury is going to put in place a 10b5-1 plan. You know, one of those things that the SEC is supposed to be investigating because of how insiders are using to manipulate markets and disguise their trading intentions.
These hot buttons aren’t fully pressed, of course; it’s more of a glancing touch. The appropriate response, of course, is “shut up, it’s the government, they’re not supposed to be nice accommodating major shareholders with fiduciary duties to the company and the market; they’re supposed to be doing governmenty things.” This is more or less the answer that a court gave in dismissing Hank Greenberg’s lawsuit against the government over the AIG bailouts. Acting as a Federal instrumentality – saving the world, the financial system, or just the auto industry, as the case may be – preempts, legally and perhaps spiritually or whatever, your more prosaic responsibilities as a shareholder and market participant.
And of course that answer is right. Treasury is not a regular market participant; it, as it were, answers to a higher power. It’s a lot more palatable for Treasury to sell to the company at a premium, or to sell to the market opaquely, than it would be for a regular insider. Perhaps it should also be more palatable for Treasury to sell at a loss.
Treasury Announces Intent to Fully Exit GM Investment Within the Next 12-15 Months [Treasury]
GM to buy stake from Treasury; government may lose billions [Reuters]
GM to Buy Back $5.5 Billion in Stock From Treasury [WSJ]