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GM fact of the day
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.
Posted by Tyler Cowen on December 24, 2008 at 11:16 AM in Data Source | Permalink
Comments
Tyler, I'd like to read your comments on this Lucas' opinion on monetary policy
http://online.wsj.com/article/SB122999959052129273.html
Posted by: E. Barandiaran at Dec 24, 2008 11:21:45 AM
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.
Posted by: Ian D-B at Dec 24, 2008 11:28:16 AM
GM is also worth 10% of Apple's cash on hand
Posted by: Raționalitate at Dec 24, 2008 11:39:12 AM
In the restructuring they could change name to Generous Medical and sell health insurance.
Posted by: Andrew at Dec 24, 2008 11:40:05 AM
Even better, let's convert GM into our new national healthcare system.
Posted by: Patrick at Dec 24, 2008 11:42:52 AM
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.
Posted by: Barbar at Dec 24, 2008 12:12:29 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.
Posted by: Bernard Yomtov at Dec 24, 2008 12:12:38 PM
Also, is this why GM was opposing the push for a nationalized health care system back in the 1990s?
Posted by: Barbar at Dec 24, 2008 12:14:05 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.
Posted by: thehova at Dec 24, 2008 12:22:43 PM
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.
If these companies went out of business, they would be losing an infinite amount of money per car they sell. If they vastly expanded their production, these legacy costs would be a lot smaller on a per-vehicle basis. Obviously Steyn is simply arguing that it's time for the US automakers to seriously expand. I mean, don't they want to make as much money per car as possible?
Posted by: Barbar at Dec 24, 2008 12:28:31 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.
Posted by: Ian D-B at Dec 24, 2008 12:46:22 PM
But isn't the value of GM's equity the best big picture understanding of their situation.
Say I want to start a widget company. I need $100 to do so.
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.
Is my company really worth 4 times as much under Scenario A as under Scenario B?
Posted by: Barbar at Dec 24, 2008 12:46:43 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?
Posted by: Silas Barta at Dec 24, 2008 12:46:53 PM
sorry, I misspoke -- GM's equity is worth far less than its own cash on hand.
Posted by: Ian D-B at Dec 24, 2008 12:47:21 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.
Posted by: 8 at Dec 24, 2008 12:56:44 PM
I wonder how many pensions they are paying. The auto industry has re-discovered that private pension plans punish efficiency.
Posted by: efp at Dec 24, 2008 1:03:18 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.
Posted by: at Dec 24, 2008 1:16:18 PM
Ok, that makes sense. Thanks for the explanations on valuation.
Posted by: thehova at Dec 24, 2008 1:48:01 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.
Posted by: Alan Brown at Dec 24, 2008 1:48:19 PM
This looks like one of those factoids that's repeated without checking because it confirms existing biases. Can someone provide references?
This article from three years ago said 300,000 employees:
http://www.businessweek.com/the_thread/economicsunbound/archives/2005/07/why_gm_is_so_op.html
Wikipedia says 266,000 employees and provides a reference to this page:
http://zenobank.com/index.php?symbol=GM
This NY Times article says 19,000 of 74,000 hourly workers took a buyout in May:
http://www.nytimes.com/2008/05/30/business/30auto.html
Posted by: Brian Slesinsky at Dec 24, 2008 2:34:33 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.
Posted by: Curt Fischer at Dec 24, 2008 3:56:16 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.
Posted by: Curt Fischer at Dec 24, 2008 3:56:29 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.
Posted by: Bernard Yomtov at Dec 24, 2008 4:15:49 PM
"The guy sweeping the floor at a GM plant is doing something more constructive and useful than Steyn."
Yeah, but due to the UAW work rules, GM has to pay four workers to have one guy sweeping the floor.
Posted by: RJ at Dec 24, 2008 5:04:58 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.
Posted by: MM at Dec 24, 2008 5:33:26 PM
