General Motor’s CEO, Dan Akerson, recently proclaimed that GM’s balance sheet was “pristine” and that the company was aiming to have zero debt in the future. I guess the question is, “how do you define pristine?”
The recent prospectus for GM’s Preferred Series “B” share offering gives the following accounting of some of the company’s liabilities: as of September 30, 2010, $10.3 billion of outstanding debt and $9 billion Preferred Series “A” obligations. In addition, there are still under-funded UAW pension obligations of over $20 billion. The Preferred “B” share offering was for another approximate $4.5 billion of shares paying a 4.75% dividend. This is money that GM already has mostly committed to UAW obligations.
The issuance of preferred shares to pay other obligations is a disturbing reminder of GM’s “smoke and mirrors” approach to public relations. While Akerson boasts about steering GM towards zero debt, the debt obligations are just moved to the equity side of the balance sheet. Whether a company pays a 4.75% dividend from a preferred issuance or 4.75% interest on debt does not significantly change the company’s cash flow. GM once again appears to be skating a thin line when it comes to honesty, just as it did when Ed Whitacre proclaimed in a televised advertisement that GM had completely paid back all of its government loans.
Time will tell if General Motors is truly on the path to a successful and profitable future. Investors have reason to be wary of valuation expectations, particularly given the history of GM’s less than trust inspiring culture. When considering GM as an investment choice, perhaps the best hint of accounting credibility can also be found in the GM Preferred “B” prospectus where it states, “We have determined that our disclosure controls and procedures and our internal control over financial reporting are currently not effective. The lack of effective internal controls could materially adversely affect our financial condition and ability to carry out our business plan”. The implied lack of accounting credibility may be the reason that GM shares did not soar to over $40 after its IPO as many television financial pundits predicted.
GM’s Stagemanaged IPO (Investor’s Business Daily)