Posted 6:30 AM by steve

The federal government is going to receive a 70% stake in General Motors in return for 'investing' another $50 billion (note: the Washington Post reports the additional 'investment' is only $29 billion).

Using the lower number, and ignoring the $19 billion the federal government has already loaned GM (treating it as a a sunk cost), and ignoring the equity being given to the UAW in return for whatever paltry concessions they are making, getting 70% for $29 billion puts an enterprise value on GM of almost $42 billion.

And who in their right mind would pay $42 billion for GM?

Using a Price/Earnings ratio of 14-to-1 (there are companies with higher multiples and companies with lower multiples, but 14-to-1 makes the math easy), GM would need to have profits of roughly $3 billion.

So how does GM close the gap between the tens of billions of dollars they're losing and the $3 billion in profits needed to even come close to remotely justifying the government's 'investment'?

I have no idea. The 'concessions' the UAW is making come nowhere near closing the gap. And I haven't even factored in GM being pressured to produce even more small (money-losing) cars and fewer (money-making) SUVs, a move that will make environmentalists happy but will do no good to GM's finances.

So back to my question, who in their right mind would value GM at $42 billion? The answer: nobody with a shred of business sense. Nobody who thought it necessary to see a return on investment. Nobody who was using their own money.

In other words, only a politician who mistakes their success at extracting campaign contributions for business acumen. Only a politician who ignores the immorality of taking so much money from one group of people in order to dole it out to favored friends.