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Everything You Need to Know About the GM IPO

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GOVERNMENT MOTORS
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General Motors filed yesterday for an initial public offering. Below are some frequently asked questions to help explain exactly what this means.

Hey Kevin, saw this GM IPO thing. After the IPO  will I, as a taxpayer, still own General Motors?


Yes. Although you wouldn't not know it from all the media spin. In fact, here is just one example, picked up off The Drudge Report, of a misleading headline and story that creates far more confusion than anything else: "Death of 'Government Motors' Offers Obama a Welcome Victory." Hahaha. Government Motors isn't dying. It's not even sick!

Crap. Okay fine. How much of GM will we own after this IPO?

Right now, the U.S. Treasury - you, me, the people who pay taxes - owns 304 million shares of GM, 0r 61 percent of the company. Through the IPO, the Treasury is trying to unload 20% of those shares, about 60 million. The filing with the SEC yesterday indicated GM will have 500 million shares outstanding after the IPO. Let's do something most news organizations apparently can't, which is subtract 60 million from 304 million (the answer is 244 million) and then divide the answer (244 million) by the number of common shares outstanding after the IPO (500 million). The answer is .488, which means even after the IPO we'll own 48 percent of GM. Forty-eight percent! Hahaha. No, Government Motors isn't going anywhere.

Kev, when I saw all the underwriters of the offering syndicate -- Morgan Stanley, JP Morgan, BofA Merrill Lynch, Citi, Goldman Sachs, Barclays, Credit Suisse Deutsche Bank, UBS and RBC -- I wondered if this whole thing is basically just a thinly-veiled scam that allows the banks to siphon yet more taxpayer money into their pockets. Am I being too cynical?

No. It's essentially a scam. But the scam was institutionalized long ago, so now it just passes as "doing business." I mean, an initial public offering for any company does involve some legitimate work; somebody has to value the company, tell them what they're worth, try and guess how much stock can be sold and plan the road shows where all the bankers in the syndicate get to travel all over the country (probably the world in this case) giving Powerpoint demonstrations, playing golf, going out to dinner and quaffing jeroboams of expensive wine straight from the bottle. Look, every top dog of every bank went to Washington D.C. in May to lobby Treasury and GM to be lead underwriter, the exception being Goldman's Lloyd Blankfein since he probably figured, correctly as it turns out, that his firm had at least a co-underwriter gig in the bag. These cats don't get out of bed for less than 10 million dollars, so the IPO is big business. How big? We're talking in the neighborhood of $360 million dollars big. Nobody loves big business the way big business loves big business.

Wow, that is really cynical. Aren't you being too hard on the banks and GM? I mean, somebody has to do this work, right? 

You're right. That's really cynical. You know what else is cynical? GM agreeing in May to pay Lazard Freres & Co. $500,000 per month over the next year to advise them until the IPO is completed.

Well, look, if we the taxpayers are ever going to get "divorced" from GM, we have to start somewhere. This is a reasonable first step, right?

No. It's not. GM is not positioned any better for making money today than they were two years ago, apart from being capitalized by taxpayer money. The auto market is capital intensive and highly competitive. Take a look at just a few of the "risk factors" cited by GM in the IPO filing:

- Our business is highly dependent on sales volume. Global vehicle sales have declined significantly from their peak levels, and there is no assurance that the global automobile market will recover in the near future or that it will not suffer a significant further downturn.

- Our ability to attract a sufficient number of consumers to consider our vehicles, particularly our new products, is essential to our ability to achieve long-term profitability.

- The pace of introduction and market acceptance of new vehicles is important to our success, and the frequency of new vehicle introductions may be materially adversely affected by reductions in capital expenditures.

- We operate in a highly competitive industry that has excess manufacturing capacity and attempts by our competitors to sell more vehicles could have a significant negative impact on our vehicle pricing, market share, and operating results.

- Our plan to reduce the number of our retail channels and brands and to consolidate our dealer network is likely to reduce our total sales volume, may not create the cost savings we anticipate, and is likely to result in restructuring costs that may materially adversely affect our results of operations.

- Our U.S. defined benefit pension plans are currently underfunded, and our pension funding obligations may increase significantly due to weak performance of financial markets and its effect on plan assets.

- The U.S. Treasury (or its designee) will continue to own a substantial interest in us following this offering, and its interests may differ from those of our other stockholders.

- Despite the formation of our new company, we continue to have indebtedness and other obligations. Our obligations together with our cash needs may require us to seek additional financing, minimize capital expenditures, or seek to refinance some or all of our debt.

After reading all that, I'm wondering if this company should even be in business? Should it?

No. GM is only in business as GM for sentimental and nostalgic reasons. Or, more cynically, but accurately, because there are still billions of dollars to be made by lawyers, lobbyists, banks and politicians carting this thing around and propping it up like that corpse in Weekend at Bernies for maybe another 10-15 years. The U.S. government chose to prop up the company for one of two reasons: 1) because it was politically expedient , or 2) because there are billions of dollars in fees to be gained by "managing the zombie" through its perpetual financial crisis. In this case, it may be for both of those reasons. By any objective measure, a better move would have been to simply liquidate the company. Take "GM" out of the IPO filing and replace it with "Your Company Name" and try and figure out what sane person would even consider an "investment" in this company. Personally, I can't wait for the IPO road show; it will probably fall somewhere between comedy and tragedy.
POSITION:  No positions in stocks mentioned.
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