Consider the following, and see if it makes any sense outside of Wall Street: If you give me some money today, you might be able to make more money in the future. The odds are pretty grim, and even if you do make money, it’s not going to be very much. I’d like $171 million, please. Today’s announcement from the United Auto Workers VEBA, the financial trust established in 2009 to handle pensions for retired GM, Ford, and Chrysler workers, follows suit.
The VEBA will sell off 45.4 million options to buy GM stock, even though—ready for the kicker?—the options are to buy GM stock at a price way above its current value. Because they’re offered by GM directly, the options are actually called “warrants,” and guarantee the holder the right to buy GM stock at $42.31 per share at any point before the end of 2015.
With GM opening at $36.01 today, there would be no reason to exercise the warrants now, unless your backward mantra is to buy high and sell low. But there are some speculative investors willing to buy the stock warrants, hoping GM’s stock continues the upward trend it’s taken this year. If the stock price passes $42.31 per share, the warrants themselves become profitable. But the warrants themselves were, today, priced at $3.85 apiece. That puts the magic number north of $46.16. Simply stated, in the next 16 months GM would need to become about 30-percent more valuable than it is today for buyers of the UAW’s warrants to make money.
But we live in a world of risky investments and over-the-counter derivatives—the latter essentially are investment insurance for banks, hedge funds, and big-time businesses. The UAW and GM probably will be able to shift all 45.4 million warrants today. It’s a very smart move. If the sale is successful, the VEBA pick up $171 million in cash now, and whether GM’s stock rises enough by the 2015 deadline to make those warrants worth something is someone else’s problem. Whether General Motors stock rises in general, though, remains the VEBA’s problem; it still owns 10 percent of the automaker.
Source: CarAndDriver
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