GM 1-to-100 Reverse Split? Uh-oh…
Written on May 5, 2009 by Ryan Freund
It’s official; General Motors (NYSE: GM) common shares are in their final death throes.
Just a few moments ago, General Motors indicated it’s intention to seek a 1-for-100 reverse split on its common stock. If you’re wondering what a reverse split is, Investopedia has a fairly accurate definition and example:
Investopedia Definition:
A reduction in the number of a corporation’s shares outstanding that increases the par value of its stock or its earnings per share. The market value of the total number of shares (market capitalization) remains the same.
Investopedia Example:
For example, a 1-for-2 reverse split means you get half as many shares, but at twice the price. It’s usually a bad sign if a company is forced to reverse split - firms do it to make their stock look more valuable when, in fact, nothing has changed. A company may also do a reverse split to avoid being delisted.
So what does this mean for GM shareholders? Well, if you own 100 shares at today’s closing price of $1.85, and if the reverse split were to happen tomorrow, your 100 shares would now be shrunken down to 1 share worth $185. Far more often than not, especially for companies in facing serious trouble (as GM is), the $185 share price post-reverse split will drop fast and hard.
As far as I’m concerned, if you’re invested in GM, get out now. At $1.85 per share, the price is insanely overvalued. If you want American car manufacturing exposure, choose Ford (NYSE: F). They aren’t treating their shareholders like dirt, and they actually have a viable business model without the support of the government.
Freund Investing Managing Member Ryan Freund holds no position in any of the companies mentioned in this article. Freund Investing has a solid Disclosure Policy.
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