The Truth About GM’s IPO
One might believe that GM’s forthcoming IPO marks the second coming of
Christ. GM, once the world’s largest corporation, faced oblivion in the
winter of 2009. The train wreck of this former company reemerged from
burial last summer through the generosity of the US and Canadian
taxpayer as a new company shorn of most of its former financial
liabilities, unproductive assets, and brands it no longer could support.
Everything that Jerry York (R.I.P.) told the automotive world in
January 2006 that GM needed to do to survive back then finally came to
pass. And now, it’s preparing an IPO to swap ownership from the
governments to the public. Ed Whitacre and his team will get the credit
for a most remarkable turnaround while Obama will bask in the light of
his stewardship of public monies. Let’s get the story straight.
For starters, GM’s “turnaround” is mostly a result of the balance sheet
restructuring. By eliminating its onerous debt load, transferring a
good portion of its UAW VEBA obligation from debt to equity, and killing
four brands along with eliminating a bunch of unnecessary assets (like
NUMMI), it greatly lowered its operating breakeven level in North
America. Think of it as you tearing up your credit cards, getting rid
of most of your mortgage and auto loans, and stop alimony payments to
your two ex-wives. You could cut your salary in half and survive. It has
nothing to do with the genius of Ed Whitacre.
Instead, GM launches a whole bunch of new products, all of which were
designed and engineered as part of the old GM, that just happen to be
pretty darn good (thanks to Bob Lutz and Ed Welburn). Think Camaro, new
Equinox, new SRX, and new Lacrosse, and maybe even the upcoming Cruze.
On top of that, GM has a potential technological “tour de force” in the
new Volt that could possibly anoint GM as the “King of Green.” Oh yeah,
GM comes out of bankruptcy during one of the deepest recession in
automotive sales in history (relative to the trend line) and start
selling again into an upswing. Then its major competitor, Toyota, stubs
its entire foot by ignoring a major design flaw that results in death
and dismemberment of several US citizens including a California highway
patrolman and family.
Even so, GM’s market share remains flatlined mostly at around 18%. But
it’s enough share (and volume) that it pays back $6.7 billion of
government debt through an escrow fund set up for extraordinary expenses
that was barely tapped – and that’s only because the terms of that extra
funding required it to be applied against the debt if it wasn’t used for
emergencies. Whitacre goes on TV and dupes the public without revealing
the true nature of the repayment. That’s like using the estate money you
inherited – which was never your money in the first place – to pay off
your bookie… but you tell your third wife she can keep her diamond ring
and now she thinks you’re her hero.
GM reports its first quarter earnings and, surprise, it makes money in
North America for the first time in years. And it even manages to
reduce losses in Europe while its China JV’s hum along nicely as before.
The future looks bright – time to put on the shades. It’s so bright
that the GM top executives look to reward themselves some $13 million in
restricted stock for just being in the right place at the right time –
and by coasting off of new products designed before some of them even
knew they’d be in Detroit.
But what’s really driving the IPO is not the requirement to raise
capital for GM. Instead, it’s a combination of factors, mostly the need
for the Obama Administration to win political points before the November
elections. A market value on the Treasury holdings – most of which it
will still own even after the IPO – will make headlines all by itself
and prove to the taxpayers that the Government Motors moniker is no
more. Second, Wall Street investment banks see huge fees of the IPO and
secondary offerings of what will be one of the larger stock issuances of
all times. Third, Ed Whitacre (and other insiders) wants to proclaim
victory and put a value on shareholdings.
What about that value? Here’s what the Congressional TARP Oversight
Panel has to say on the topic:
The valuation of New GM used by the bankruptcy court estimated that
the market capitalization (the price of all outstanding shares) of the
new entity would be worth between $59 and $77 billion in 2012. Treasury
has invested a combined $49.5 billion in the New and Old GM and
approximately 61 percent of equity in New GM.280 Assuming full repayment
of the $8.8 billion note and preferred stock issued by New GM to
Treasury, the shares in New GM will have to be worth $40.7 billion (the
difference between $49.5 billion and $8.8 billion) for Treasury?s
investment to be repaid when Treasury sells its shares, meaning the
market capitalization of the entire company needs to be worth $67.7
billion. In April 2000, when Old GM shares were at the height of their
value (not adjusted for inflation), the company?s total value was only
$57.2 billion. In other words, New GM will have to achieve a
capitalization that is higher than was ever achieved by Old GM if
taxpayers are to break even.
GM is still in turnaround mode. Yes, it will pull off an IPO – likely
by early in the fourth quarter this year – and will garner accolades
from Obama, Wall Street, and even some competitors for its remarkable
story. But GM still faces a massive problem in Europe – Opel/Vauxhall
has been a perennial laggard in a market that now looks to be moribund
for years. The new executive team hasn’t yet sold a car that it has
designed and developed for North America. And we’re still trying to
decipher the playbook of the four brands in North America. The IPO is
merely a swap of stakeholders in the company – from the government to
the public – but there’s still little there to tell us whether or not GM
in the future will be a winner. Place your bets!
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