GM may do a reverse split as its share count balloons
General Motors (GM) is going to need a lot more shares of its stock. It plans to give some to the Treasury in exchange for debt, probably about $7 billion worth. It is trying to get creditors to turn in over $25 billion in debt for equity.
All of that activity will dilute current shareholders down to the point where they will probably own less than five of the company. On the back of an envelope, that would take the price per share of the car company down to about a dime.
GM is proposing to do what many penny stock companies do. It wants to reverse split its stock to get the price per share back up to a few dollars. It is a transparent trick for solving the problem, but some institutional investors cannot put money into companies with shares that trade under $5. GM's action may dodge that issue, at least for now.
According to the AP, "General Motors Corp. says it may offer current shareholders a reverse stock split that would give them one share of new stock for every 100 shares they currently own."
That should work well if the company can keep 20 percent of a domestic car market that makes it back to 12 million vehicles sold a year by 2011. If not, the stock split won't matter.
Douglas A. McIntyre is an editor at 24/7 Wall St.