Wednesday, May 6, 2009

Someone Broke the Market

My understanding is that current/old GM equity, which has a $1B mcap, is going to - optimistically - inherit 1% of the new GM equity.

That would value new GM equity at $100B. I'm not sure how much debt new GM will have but let's be generous and say none and the new GM will have an enterprise value of $100B.

GM reported negative gross profit in 2008. It's average annual gross profit the past three years is $17B. So the EV/trailing-bubble-gross-profit is 5.9x.

GM reported negative operating earnings the past two years. The cumulative operating earnings over the past three years are also negative. If we just take the operating earnings from 2006, $9B, the market is valuing new GM at 11x.

What is the deal? These multiples are ludicrous. Do people think the old equity is going to wind up with a much bigger chunk of the company than 1%? Is the market broken because you can't borrow GM and the holders are too stupid to sell?

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