General Motors Buyback vs. Ford Warrant Expiration

Yesterday, Dec. 19th, General Motors (GM) announced it would purchase from the U.S. government 200 million shares of common stock at $27.50 a share. The previous day the stock had closed at $25.49 and on this news the stock opened at $27.44, traded as high as $27.90, and then settled back in to close at $27.18. The market took the news of the buyback as very positive, and on the news the stock traded up as much as 9.5%.

The news was good because it “gets the government off of GMs back,” shows the financial strength of the company, and is a massive buyback of stock. The result will be higher earnings per share, better P/E ratio, etc., all the better financial fundamentals that usually flow from a buyback.

We’ve been following the Ford (F) warrant expiration over the past week or so here, here and here. Apart from the halo effect of the GM price jump, how should we look at the GM buyback vs. the Ford warrant expiration? As we discussed earlier, this is a somewhat unusual expiration because it is cashless, meaning those exercising the warrants do not send in the $9.01 along with the warrant to Ford in order to get the 1.0212 shares of common. With the cashless exercise the warrant holder will get the same value they would in a normal exercise, but they do not have to provide the $9.01. The bottom line result for Ford is…wait for it…a massive stock buyback!

And, so what? What do we do with that information? We look for a pattern. We know that in general a warrant expiration produces a short term price increase, a pop, in the underlying common. But as we just described, this isn’t a typical expiration, it’s more like a buyback, along with the attendant impacts of a buyback on Ford stock.

Luckily, we have another company, in the exact same industry, that has done the exact same thing within a few days of our expiration. Now that is unusual. And the result, the stock was up 9.5% at one point on the day of the announcement.

As warrant traders we are very familiar with the normal patterns followed by common stock as warrants approach expiration. Trading these patterns gives an advantage, our “edge”, as there is a higher probability of predicting what a stock will do short term than in the absence of the expiration event. It is very rare that we get a similar event to our warrant expiration occurring in a similarly situated stock. The behavior of GM stock after the announcement of the buyback gives us greater confidence we will see a pop in Ford stock on the warrant expiration.

For a fundamental breakdown of the warrant expiration impact on Ford Adam Levine-Weinberg does a good job with an article on Seeking Alpha.