IHS Global Insight Perspective | |
Significance | General Motors (GM) has filed paperwork with the U.S. Securities and Exchange Commission (SEC) requesting that it be allowed to sell shares of both common and preferred stock on the open market, reducing the ownership stakes of the U.S. and Canadian governments in the process. |
Implications | Many aspects of the filing are still unknown, such as how much stock will be sold, what its value will be, and what the ownership stakes will look like once the sale is completed. |
Outlook | GM will face some challenges in selling the initial public offering (IPO) to investors, with question-marks over management stability and turnover and the solidity of the recovery in the second half of this year, but this stands to be one of the biggest IPOs in financial history if handled properly. |
General Motors (GM) has finally pulled the trigger on an initial public offering (IPO) of stock, officially filing Form S-1 with the U.S. Securities and Exchange Commission (SEC) and announcing a public sale of company stock. The filing is the first step in the IPO; now will follow a "road show" in which company executives will travel to various investment houses to discuss the company's prospectus and try to drum up interest in the automaker's offerings. GM says that it has not determined the amount or price range of the securities it intends to put up for sale, and the split as to how much is coming from which stakeholder is not yet publicly known. Market conditions will determine just how much GM offers for sale and how much it intends to ask for the shares. The company plans to offer two classes of Preferred Stock (Series A & B) as well as common stock, but again it is not known which current shareholders will be selling their shares. There are no plans to pay any dividends just yet, and none would be paid on common stock until Series A and B had received dividends first. The massive IPO will be handled by several banks, according to the company: Morgan Stanley and J.P. Morgan, BofA Merrill Lynch, Citi, Goldman, Sachs & Co., Barclays Capital, Credit Suisse, Deutsche Bank Securities, RBC Capital Markets, and UBS Investment Bank will be the joint book-running managers for the offering.
The filing comes just 13 months after GM exited bankruptcy protection, and after its second straight quarter of healthy profits. Some analysts have expressed concern about the timing of the IPO, given that the company still faces a tough second half of 2010 and that the U.S. economy is not rebounding as hoped. However, proponents point to the new GM's structure, one that has shed massive debt and excised capacity to the point where it is making a decent profit at industry sales volumes not seen since the early 1980s. The move is likely to have been prompted heavily by the U.S. Treasury and the Democrat administration, both of which want to divest themselves of GM ownership as quickly as possible. With the filing, the government's stake is expected to drop below 50%, still affording it majority shareholder status, but down considerably from the 63% stake it currently has. The government is unlikely to unload its entire stake immediately as that would flood the market and drive the stock price down, ultimately hurting the government's ability to recoup the US$50 billion it has invested in GM as part of the bankruptcy funding bailout.
Outlook and Implications
It may be premature for GM to have filed for an IPO, but political necessity dictates that it is carried out now. There will be a 60–90-day waiting period while the SEC reviews GM's documents and issues approval, at which point the company can trade its shares on the U.S. and Toronto stock exchanges. This will make GM the second auto company to go public this year; Tesla Motors raised millions of dollars earlier this year when it became the first automaker since Ford in 1956 to offer stock on the public market. GM needs to start the process of getting the government out of the boardroom as quickly as possible, and given this timing, a public offering by the early November mid-term elections now seems possible, if a bit tight.
GM's big challenge now will be to convince investors that it has turned the corner, that it can be consistently profitable, and that it has a long-term viability plan worked out that will make its investors money for years to come. The latest GM products to roll off the assembly lines are working in GM's favour—they are winning good reviews, gaining sales, and keeping GM's factories running well into overtime. With the product side largely ironed out, it falls to the GM management to get its marketing message and expansion plans in order. Over 72% of GM's vehicle sales volumes comes from outside the United States, according to the company, meaning that overseas markets are arguably more important than GM's domestic front. The company is succeeding here as well, with expansion into South America proceeding well and Asia still a very strong region for the company. Only Europe is set to give GM problems as it tries to explain its recovery plan for that troubled sales region, where the Opel/Vauxhall unit has not seen the same kind of cost restructuring as GM's North American business.
The other issue that is likely to dog the company over the coming period is management stability. Current chief executive officer (CEO) Ed Whitacre has basically been forced out by an ultimatum from the GM board that required him to either sign up for two or three more years in his role or else leave immediately. Whitacre chose the latter option, leaving the GM board in the lurch as it hurried to find a replacement; it ultimately chose board member Dan Akerson, a telecoms finance man whose background it is hoped will assuage Wall Street, which is still stung by GM's bankruptcy and the loss of equity that ensued. Over the past 13 months, top management at GM has been anything but stable. Whitacre reshuffled the executive ranks several times in order to try to find the right mix to deliver the results he demanded; this proved to be somewhat successful, with the biggest impact coming on the mood at the company. Whitacre took a staid corporate culture and lit a fire under it; Akerson will need to stoke that fire if GM is to continue to be successful. The arrival of new marketing guru Joel Ewanick from Hyundai will help get the company's branding on track, but the uncertainty arising from having a new CEO (the fourth in 18 months at the company) and the changes he may make to the executive ranks and corporate structure fills many with unease. From a financial standpoint, it would be hard for GM not to be successful, given that it is already quite profitable even at the depressed sales levels seen this year; if the global market takes off as expected from 2012–15, GM could be looking at massive profits.