Only General Motors' Insiders Will Benefit From IPO
General Motors filed registration papers detailing plans for a return to the stock market as a publicly owned company. However, GM's prospectus falls short in transparency -- the IPO mostly serves the needs of existing stakeholders, not new shareholders.
The S-1 filing did not specify how many shares of the listed 500 million outstanding would be offered, and by which equity holders. In addition, when the company does go public with its stock offering sometime this fall, GM will not receive any of the estimated $16 billion to $20 billion in proceeds. Selling shareholders -- those who helped keep the automaker afloat during its bankruptcy reorganization last summer, including the U.S. Treasury -- are the ones who will receive all of the monies.
Looking to mitigate political fallout from its controversial efforts to prevent a GM liquidation, in a sleight of hand the Obama administration only gave the automaker $6.7 billion in "actual" loans last summer: some $43 billion in additional federal bailout money was used to "purchase" 304.13 million shares, or about 60.8 percent of the company. In a similar move, the Canadian government lent GM $1.4 billion, and purchased an $8.1 billion equity stake, or 58.63 million shares (11.7 percent).
GM common stock is also held by a United Auto Workers' retiree health fund (17.5 percent) and bondholders of the old GM before its bankruptcy filing (10 percent).
Dubbed "Government Motors" by its critics, both the company and the Obama administration are eager to cut their mutual ties. To recoup the $43 billion of taxpayers' money used to buy its 60.8% stake, most Wall Street analysts calculate the Treasury Department would need to seek a float above $165 a share to return profits to the U.S. public.
A successful offering, however, is expected to price shares at $120, according to analysts at Dow Jones Investment Banker, based on a multiple of 7.2 times anticipated 2010 earnings (before taxes and depreciation) of $11.4 billion.
The new GM earned $2.9 billion (before taxes) for the first six-months of 2010. Although the automaker shed billions of dollars in debt and retiree health care costs during its 2009 reorganization, in my opinion, it'll be a stretch for GM to hit 2010 EBITDA of $11.4 billion, as the company faces formidable obstacles in coming months: including, increases in raw material costs and growing concerns of a "double-dip" recession. Second-quarter GDP grew 2.4 percent, less than varied estimates of three - four percent growth.
Furthermore, JP Morgan (JPM) recently said that second-quarter U.S. GDP growth of 2.4 percent would likely be revised downward to about 1.3 percent. The "combination of rising initial jobless claims and soft consumer spending" poses significant risks to second-half 2010 growth too, according to an economic report released last week by the investment bank.
Chief financial officer Chris Liddell acknowledged as much to analysts during the company's second-quarter 2010 earnings call:
The second half (of this year) will be lower than the first half. You'll see some moderation.... in GM's performance, said Liddell.Retail buyers participating in the public offering also should be aware that their ownership stake could be subject to immediate dilution, depending on how the share price trades in the secondary market: current stakeholders could exercise held warrants -- at strike prices ranging from $30 to $126.92 per share -- totaling 106 million additional shares, according to GM's preliminary prospectus.
Buried deep in the more than 700 pages of GM's prospectus was a warning, too, that the bankruptcy court could issue more than $37 billion in third-party claims pending -- probably in the form of stock and warrants (for additional stock payable in the future at a preset price). In other words, buyers of the common stock in the initial offering would face even more dilution.
It's been suggested that GM could also access as much as $3 billion in new capital from the planned sale of convertible preferred stock.
Unanswered questions, including the size of the deal and how many shares the U.S. Treasury Department would seek to sell, will likely be answered in coming weeks as GM files additional regulatory documents and management hits the road, making "cool-looking" powerpoint presentations meant to drum up institutional support for the IPO.
Retail investors ought to heed caution, too, that institutional buying during the initial public offering is nothing more than feigned support for GM: institutional investors have the means to simultaneously execute short sales and other risk arbitrage maneuvers meant to limit downside exposure to a slide in GM's common stock in secondary trading. Purchase of the stock by the big folks is nothing more than a "scratch your back" exercise, an "IOU" for guaranteed participation in more profitable deals down the road from the Wall Street underwriters, which includes such marquee names as Bank of America (BAC), Morgan Stanley (MS) and Goldman Sachs (GS).
Don't refuse to go on an occasional wild goose chase -- that's what wild geese are for. ~ Author UnknownIndividual investors ought to think hard before jumping aboard GM's goose chase, as few of the geese are likely to lay any golden eggs.
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