Willens believes GM will be able to make the case that it has a better than 50% chance of earning at least $8 billion before its tax credits expire. That means it could add $3.2 billion (the tax bill for that expected $8 billion) both to earnings and book value the day the deal closes.
Though $3.2 billion in earnings is nothing to sneeze at, the growth in book value is likely to have a bigger impact on GM's share price once it goes public, which according to
is expected to happen before the U.S. elections in November.
The boost to book value is likely to outweigh the earnings in investors' minds because they will realize the $3.2 billion in earnings did not come from operating earnings, but rather from some complex tax maneuvering. On the other hand, the equivalent growth in book value will be a permanent part of investors' calculations when they are trying to figure out how to value GM's stock.
"Once those earnings flow into book value, the fact that they arose from an unusual tax accounting benefit isn't going to matter," Willens says.
GM has lots of flexibility in terms of when it records the tax benefit from the deal. It could record the entire $3 billion benefit as soon as the deal closes, or it could slowly lower its valuation allowance over several quarters or even years, according to Willens.
Stretching out the tax benefit over an extended period would attract less attention than recording it all at once, and GM may see that as a good thing. The fact that GM, more than 60% of which is owned by the U.S. government, is using cash to make acquisitions has rubbed many people the wrong way. The strategy stands in contrast to that of
(AIG - Get Report)
(C - Get Report)
, two other big bailout recipients that have been selling assets.
"If GM has $3.5 billion in cash to buy a financial institution, it seems like it should have paid back taxpayers first," stated Sen. Chuck Grassley (R.,Iowa), in a press release last month after GM announced the deal. "After GM's experience with GMAC, which left GM seeking a taxpayer bailout, you have to think the company and, in turn, the taxpayers, would be better off if GM focused on making cars that people want to buy and stayed clear of repeating its effort to make high-risk car loans."