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"Owns" isn't exactly correct. Well, yes it is, but then again, not really. OK, GM owns Hughes. But Hughes also trades on the NYSE as GMH. You can buy shares in it, so who owns Hughes? GM does. GMH is a "tracking stock," which is an interesting animal.
Consider the lemonade stand used by every financial writer who wants to render an investing concept simple. This particular lemonade stand noticed that the skate rental business across the street was having some troubles during an exceptionally cold and wet summer and bought it out. They kept the skate inventory intact and hired the kid who fitted the skates and waited until the weather got better. Meanwhile the kid who fitted the skates invented rollerblades.
Next summer things went very well for the Lemonade Stand. The skate business boomed and started getting lots of attention. You might think that the Lemonade Stand would sell the skate business now that it was a healthy, going concern, and take its profit; after all, what do lemon squeezers know about skate keys and wrist guards? Many rumors to that effect went 'round the neighborhood, but instead, the owners of the Lemonade Stand decided to treat the skate business as a tracking stock.
Here's how they did it: They figured that the skate business was worth $100. Then they sold 30 shares of the tracking stock for $1 each. Every year, the profits from renting skates would be divided by 100 and 30% would go to the owners of the tracking stock, while 70% would be kept by the Lemonade Stand and shared with its stockholders.
The shares of LSR (Lemonade Stand-Rollerblades) were not real ownership shares, though. The owners of those 30 shares "owned" a portion of the skate rental company's earnings but did not have the right to manage the company, nor did they own the assets of the LSR, such as the skates. They were, however, promised that if LS ever decided to actually spin off the skate rental company, their shares would become full ownership shares.
Since the skate rental business was going great guns, people were eager to buy it. The Lemonade Stand hired a sixth-grader who was adept at fractions to make sure that the two businesses kept their accounting separate and everyone was happy -- until Jessica skated into a piece of improperly disposed of bubble gum originally sold by LS, but that's a story for a more litigious day.
In the case of GM and Hughes, GM has decided that rather than spinning off Hughes as a separate company, it would do a kind of internal spin-off by creating tracking stock shares that would be tied to the value of Hughes. They originally sold shares equal to about one-third of the value of Hughes. Now, they are giving up more of their rights to Hughes' earnings by creating tracking shares for another third of Hughes and offering to swap them for existing shares of GM stock.
Note that this is not a dilution of GM (or Hughes) stock. If the new shares were simply being created and sold on the open market, that would increase the pieces of the ownership pie, diluting the ownership of GM and Hughes. But in effect, GM is concentrating the ownership of Hughes into $15 billion worth of GM shares and then changing those shares into Hughes tracking shares. GM will still own 35% of Hughes outright after the stock swap, i.e., they will "own" all of Hughes' assets and 35% of their earnings.
GM will be exchanging only $8 billion worth of shares, the remaining $7 billion will be contributed to GM pension and retirement funds, which will also benefit GM shareholders by reducing the need to contribute to those funds for some time, which is definitely good for earnings going forward.
OK, you're a Foolish Four investor and you are wondering if you should take advantage of this offer and swap some or all of your GM shares for Hughes. What to do, what to do?
The Foolish Four portfolio won't be taking advantage of the offer because it is committed to following the strategy exactly -- had such a situation arisen in our backtest we would have stuck with the parent stock. But that doesn't mean that sticking with GM is the best choice. If I were not managing this portfolio as an example of a strictly followed mechanical strategy, I confess, I would be very tempted to exchange at least some of my shares. I don't get DirecTV, but I can certainly see its appeal and potential.
This should not be bad for GM stock in any way, though. Because the Hughes stock is being swapped for GM stock, the transaction will act like a stock buy-back plan, reducing the number of shares outstanding and boosting GM's earnings and dividends per share. True, GM owners will now own stock that is more tied to building cars than beaming old Star Trek episodes into your satellite dish, and if Hughes grows at a faster rate than GM, GM will profit less from this growth. That bothers me a little bit, but that negative is offset by the positives of fewer shares outstanding and higher earnings per shares. Also, so far at least, Hughes doesn't pay dividends, so even though its owners have a theoretical right to its earnings, those earnings are not yet available to them, while GM pays a nice dividend with the prospect of a higher one to come. That's not difficult to live with.
Fool on and prosper!