General Motors' reverse split plan suggests a bleak outlook

If you can't get the stock price to go up, you can always try playing the Jedi mind trick game of stock splits, reverse splits and stock dividends.

In a filing with the SEC, General Motors (NYSE: GM) disclosed its plan to effect a 1-for-100 reverse split of its common stock. The plan is part of an agreement with the Treasury Department that would give the United States government a majority stake in GM in exchange for taking on the company's debt obligations.

Normally reverse splits are signs of desperation that aren't worth commenting on, but in this case, it's an even worse sign than usual. At the current price, a 1-for-100 reverse split would peg each GM share at $185 -- nearly double the all-time high of $93.63 the stock hit in April of 2000.

From a liquidity perspective though, a $185 stock is very pricey. At that level, many companies would be opting for forward-splits to reduce their stock prices. The plan for a 1-for-100 reverse split suggests that the Treasury Department and GM are extremely bearish on the future value of the company's shares, and expect that by the time the reverse split is executed, market declines will lead to a market value substantially below $185 per share.

There are billions of other reasons not to buy GM stock, but this is the latest one. A 1-for-100 reverse split of a $1.85 per share stock suggests that investors are in store for more severe price declines.
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Last updated: February 09, 2010: 11:41 PM

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