What happens when the stock market goes to zero?

March 12, 2009 11:34 AM

Why are these companies free?In which we learn about "negative enterprise value" and an interesting prospect of using a market collapse to get free money. "Seemingly, a buyer who can afford all of the shares can end up being paid to own these companies."
posted by Cool Papa Bell (28 comments total)

I wondered about this last week when GM had a market cap of about $800M. (They're now up to $1.3B). Why would the government consider giving them $16B in bailout money when they could control the whole company for a few hundred million? Is market cap a real value or is it essentially meaningless?
posted by rocket88 at 11:46 AM on March 12 [1 favorite]

Of course, these companies aren’t truly free, or even necessarily cheap.

That's right.
posted by krinklyfig at 11:47 AM on March 12

RealNetworks? The question is "Why is this company still in business?" Someone should buy them for the cash and then shut it down.
posted by GuyZero at 11:50 AM on March 12 [1 favorite]

RealNetworks? The question is "Why is this company still in business?" Someone should buy them for the cash and then shut it down.

Someone should offer to buy them and then when they call back to get the final paperwork signed you just hold up a sign that says "BUFFERING....".
posted by DU at 11:57 AM on March 12 [12 favorites]

Cut taxes!
posted by Postroad at 11:57 AM on March 12 [1 favorite]

Seemingly, a buyer who can afford all of the shares can end up being paid to own these companies.

Um, isn't that sort of the gist of shareholding. What is this 1650?

I give you some money to run your company, in turn you give me a piece of paper that says that I own X amount of your company. When you do well you give me dividends. If your company does well I can sell my piece of paper to some other guy for more than I gave you and then that guy gets the dividends. Huzzah!
posted by Pollomacho at 11:58 AM on March 12

Why would the government consider giving them $16B in bailout money when they could control the whole company for a few hundred million?

If the government bought all the outstanding shares, GM wouldn't get any money. It would all go to shareholders. GM would still be burning through cash and need more to continue operations.

Is market cap a real value or is it essentially meaningless?

It's just stock price multiplied by shares outstanding. Its meaning depends on context.
posted by mullacc at 12:08 PM on March 12

Um, isn't that sort of the gist of shareholding.

Um, no. That's not what the article is talking about. We're talking about companies that are worth less then their cash holdings today not their future value. If you look at Sun Micro systems, they've got something like $3 billion in cash, less then their market capitalization back in november/december. They're now slightly above that figure.

If you bought the company, then fired all the employees and gave away their entire inventory of computer hardware you'd still make a profit. And in fact, some people came in and bought large portions of the company and got some board seats in hopes that something like that might happen (or something like that, I think)

Ordinarily a when you buy stock in a company, you're expecting the company to continue operating and eventually paying a dividend, making the stock worth more then your share of the current bank account and assets of the company.
posted by delmoi at 12:10 PM on March 12

If you bought the company, then fired all the employees and gave away their entire inventory of computer hardware you'd still make a profit. And in fact, some people came in and bought large portions of the company and got some board seats in hopes that something like that might happen (or something like that, I think)

This is what Carl Icahn did to TWA.
posted by mkb at 12:22 PM on March 12

If the government bought all the outstanding shares, GM wouldn't get any money. It would all go to shareholders. GM would still be burning through cash and need more to continue operations.

On the other hand, if the government bought all the outstanding shares and floated GM's operations until it becomes profitable again, then GM would no longer be burning through cash and the public would collect the returns. At the very worst outcome, the government would own GM outright and it can be retooled for other more productive purposes.
posted by Blazecock Pileon at 12:22 PM on March 12

I guess my point is that no private capital firm would invest $16B of operating capital into a company worth $1B without getting a massive controlling ownership stake in return. But isn't that exactly what the US Government is proposing to do with taxpayer money?
posted by rocket88 at 12:24 PM on March 12

... and the pissmop who sits at the top of the executive pyramid raking in the cash while the employees and retirees get fucked over would be sprawled on the street with a suitcase flying at his head. Sign me up for that shit.
posted by seanmpuckett at 12:26 PM on March 12

This is what Carl Icahn did to TWA.

More or less, yeah, although he did run the company for several years. But he certainly inspired Gordon Gekko's plans for Bluestar Airlines ...
posted by Cool Papa Bell at 12:33 PM on March 12

I feel like this is AskMe already. :)

Yes, the government could do this if the goal was to make money by shutting down GM. The gov't would make a profit. But GM would either be shut down (no more jobs) or still failing. What is the point of the gov't cheaply taking over a failing company just to own it? It still needs money, which is why they go the expensive route of infusing money to help it succeed.

In theory, anyway. None of this will make GM's cars not suck.
posted by rokusan at 12:39 PM on March 12

I guess my point is that no private capital firm would invest $16B of operating capital into a company worth $1B without getting a massive controlling ownership stake in return. But isn't that exactly what the US Government is proposing to do with taxpayer money?

Well, it's a loan...a loan I wouldn't make myself, but us taxpayers as a group are shitty negotiators.

Yes, the government could do this if the goal was to make money by shutting down GM. The gov't would make a profit.

LOL. GM's balance sheet is comically underwater. $91B of total assets and $177B of liabilities. I haven't done the analysis, but even throwing out the pension liabilities, it's not clear that there's even enough liquidation value to cover the senior lenders. The equity isn't even close.
posted by mullacc at 12:53 PM on March 12

I guess my point is that no private capital firm would invest $16B of operating capital into a company worth $1B without getting a massive controlling ownership stake in return. But isn't that exactly what the US Government is proposing to do with taxpayer money?

It's called lemon socialism, and it's exactly what we're getting. Blame those who made nationalzation a dirty word. You can also blame those who hurl the word "socialist" around as if Obama were Eugene Debs.
posted by IvoShandor at 1:00 PM on March 12 [2 favorites]

I don't even know why we're discussing GM in this thread. GM's stock may be headed toward zero, but it doesn't have negative enterprise value. Not even close.

A company that has negative enterprise value is solvent by definition because it must have more cash on hand than debt. Doesn't make the stock a good investment necessarily, but it's interesting to look at.
posted by mullacc at 1:02 PM on March 12

On the other hand, if you are managing in some way a very lucrative company, one especially in the energy business, you can keep a lot of your money by doing what these folks are doing:

http://www.reuters.com/article/rbssEnergyNews/idUSL312427120090312?feedType=RSS&feedName=rbssEnergyNews&rpc=22
posted by Postroad at 1:08 PM on March 12

It's only profitable to buy a company, shut it down, and take all the cash when cash>market cap AND total debt (this could get more complex when you consider working capital, but let's keep it simple). So in the case of GM, where as of 12/31/08 cash is approximately $14 billion, long term debt is $30 billion, and current market cap is $1.2 billion, if you buy GM and immediately shut it down (assuming zero salvage value), you still owe bondholders $15 billion (not to mention pension liabilities).

On the other hand, if you put GM into bankruptcy and wipe out a boatload of bondholders, you have a chance of saving the company. Government ownership of GM rotates around bondholders willing to walk away with much less than they started. If you takeover GM now, you're costing the taxpayers billions of dollars and rewarding bond investors. That is the definition of moral hazard.
posted by SeizeTheDay at 1:08 PM on March 12

Same story with banks, BTW. Nationalism without bondholders taking a loss costs taxpayers hundreds of billions of dollars.
posted by SeizeTheDay at 1:11 PM on March 12

Damn iPhone and slow Internet. I basically just repeated what mullacc said.
posted by SeizeTheDay at 1:20 PM on March 12

I've talked to a bunch of investment managers over the last few months who have brought this up in some way or another - mostly an offhand comment about the number of companies trading below net cash. It's unusual for most larger companies, but you see it quite often in a lot of small, weird health care or technology companies because they have no revenue. They are quickly burning through the cash that you subtracted off in the enterprise value calculation. As they say: "If the odds are good, then the goods are odd."
posted by milkrate at 2:25 PM on March 12

Someone should offer to buy them and then when they call back to get the final paperwork signed you just hold up a sign that says "BUFFERING....".

"Sorry, you need Bic Pen 9.7.6.0.5 to sign this content. Please download the new version HERE for 179.95 if you want the deluxe professional version or HERE if you want the free version but trust us you don't. Yes, we know your pen worked the last time, but that was two weeks ago and we have to feed the mortgage."
posted by dhartung at 3:55 PM on March 12 [2 favorites]

or HERE if you want the free version but trust us you don't

Yeah, if only finding the free version had been so easy. Instead, it was an Easter Egg hunt through their many menus and pages every couple of weeks. And not the fun kind of Easter Egg hunt where you get candy, the sad kind where the "winner" finds a 3 day old corpse hidden in a cave.
posted by DU at 4:01 PM on March 12

You can't actually buy all (or even a majority) of the shares at the nominal "market capitalization". That figure is just the most recent share trade multiplied by the number of shares. In other words, it's the company valued at the lowest price placed on it by any shareholder and the highest price placed on it by any prospective purchaser.

All the shareholders that are hanging on to their shares believe that the company is worth more than that nominal figure, and all the other prospective purchasers believe it is worth less than that nominal figure. If you want to accumulate shares you'll have to start paying more than the other prospective purchasers; and if the words get out that you're accumulating then some people who presently hold shares might decide to raise their price. And, of course, most shares aren't being traded at any one time, so you will only be able to get a majority stake by letting shareholders know that want to buy their shares. And you're also going to trigger takeover rules, so there really isn't any way of keeping things quiet while you get majority ownership.

(*) Not unless you live in Germany, anyway. Porsche recently managed to do something very much like this because they lack the sort of takeover rules that most big exchanges have.
posted by Joe in Australia at 4:36 PM on March 12

Metafilter: where the "winner" finds a 3 day old corpse hidden in a cave
posted by ElvisJesus at 5:00 PM on March 12

Why would the government consider giving them $16B in bailout money when they could control the whole company for a few hundred million?

If the government bought all the outstanding shares, GM wouldn't get any money. It would all go to shareholders. GM would still be burning through cash and need more to continue operations.

At the very least, though, the government should be giving them $16B in bailout money and purchasing the $800M in shares. That's fair market value for them. Stockholders should be pleased: it's a hell of a lot better than losing it all if GM fails. And $800M is a drop in the bucket compared to the bail out.

It'd be win-win for everyone. Plus it would give the government the ability to appoint good business managers to the Board. Put the likes of Buffet, Jobs, Gates, Kamen, etc on the Board of Directors. Watch GM become the world's leading transportation research and development company. It'd finally be competing against the likes of Toyota and Honda, who are putting huge money into figuring out how to meet customer expectations and demands — things that are flat-out contradictory, like "lots of horsepower" and "green" and "luxury" and "cheap."
posted by five fresh fish at 8:04 PM on March 12

Metafilter: where the "winner" finds a 3 day old corpse hidden in a cave

In London.
posted by rokusan at 9:24 PM on March 12