What Will GM Gain From the U.S. Treasury’s Exit?
There’s no question the image of General Motors (NYSE:GM) suffered from receiving a government bailout, but it was a trade-off the automaker had to make to survive. As the U.S. Treasury plans to sell off its remaining shares of General Motors stock, investors curious about the impact of a government exit can expect real effects for the company in the short and long term.
A new executive class
Reports have indicated General Motors is considering a successor to chief executive Dan Akerson, a move that would shake up the executive ranks under the automaker’s top post. An exit by the government will mean GM has the freedom to offer more generous compensation packages for its next company head.
According to The Wall Street Journal, part of the conditions the government imposed when dishing out bailout funds was limiting the pay packages for GM’s top five executives as well as the twenty best-paid employees below them. GM will have the freedom to offer competitive pay to the next chief executive and any officials who come on board as a result of the company shakeup. The government exit also means direct compensation for shareholders.
Return of the GM dividend
After the U.S. Treasury sells its stock by early next year, GM will be able to reinstate dividend payments to shareholders. That represents financial strength and independence to investors who have had only Ford (NYSE:F) among the Detroit Three as a dividend stock in recent years. Michelle Krebs of Edmunds told Bloomberg that a GM dividend would mean “a significant move toward normalcy.”
That return to dividend-stock status should have an impact on the investor profile as well as the image GM hopes to maintain when matched against Ford, which has seen a surge in its reputation for not accepting bailout funds.
The road to equal footing
Once GM sheds its “Government Motors” image, auto consumers will start to feel better about buying the Chevy, GMC, Buick, and Cadillac brands. Reports in October indicated GM was having trouble with its roll-out of the new Silverado and Sierra due to its image in Texas — the biggest pickup truck market — because of the reputation for accepting government bailout money. Though this perception won’t disappear overnight, there is reason to believe it will get better with time and allow GM to gain back some of the status it lost to Ford.
GM’s Mark Reuss told Bloomberg that government ownership was “problematic” during the new pickup launch, but that obstacle will be out of the way when the final shares are sold off by the Treasury. For the government, it’s time to assess whether the investment it made in the Troubled Asset Relief Program (known as TARP) was worth it.
The bailout’s real value
Critics of the bailout are quick to point out the government will lose approximately $10 billion on the $50 million it invested in GM. While that number is demoralizing, the Treasury is turning a profit on the auto and banking bailouts as a whole. The Wall Street Journal reports the government has recovered $431 billion on the $421 billion it invested on the two industries. More is on the way when the Treasury sells it remaining GM stock.
More importantly, the Center for Automotive Research (known as CAR) estimates the bailout saved 1.14 million jobs, which is the equivalent of almost $100 billion in annual income for the employed workers, according to Bloomberg. CAR estimates the government would have paid nearly $30 billion in jobless benefits to the affected workers while Social Security contributions would have dwindled without the huge pool of workers on the job.
With those numbers in mind, it’s hard to question the success of a $10 billion investment.
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