General Motors executives are playing up three bright spots in the company's future as they try to persuade investors to buy GM stock: a better lineup of cars and trucks, potential for global growth and a new cost structure that enables the company to make money even when the economy dips.
But the world's most charming used car salesman couldn't cover up major concerns hanging over GM's initial public offering on Thursday.
GM emerged from a government-organized bankruptcy just 16 months ago, a process the company says has made it stronger and healthier. The reorganization erased debt and lowered labour costs. It also removed $27-billion (U.S.) from the wallets of bondholders and left stockholders with nothing. Taxpayers spent more than $50-billion to save GM from ruin between December 2008 and July 2009 and are not expected to get all their money back.
Critics say GM is speeding into its IPO before it has proved that its structural problems are fixed. Other IPOs often leave the investing public a little slap-happy: Each newly minted stock certificate could turn into the next Walmart or Apple, but it's rare that one does.
In the days leading up to GM's New York Stock Exchange debut, investment bankers say they have more orders than stock. Joe Phillippi, president of AutoTrends Consulting, says he expects GM's IPO will price even higher than current estimates - up from a range of $26 to $29 a share to as high as $32 a share.
But even if the stock pops on the first day of trading, the red flags aren't going away.
Mr. Phillippi expects company will continue improving as time goes on.
"It's going to be a slow and steady march back upward," Mr. Phillippi says.
Here are some reasons investors may want to sit this one out:
1 - EVEN WITH AN IPO, GM IS STILL GOVERNMENT MOTORS
You might find the nickname clever, but inside the company, it's an embarrassment and the driving force behind the decision to hold the IPO as early as possible. GM wants the government sell off its shares.
"We want the government out. Period," chairman Ed Whitacre said this summer. But the IPO process will be more like a drawn-out divorce between GM and taxpayers. This stock offering will only reduce the government's stake in GM from 61 per cent to 43 per cent. It will take more stock offerings, staggered over the next few years, before the U.S. government is out of the car business.
For shareholders, that means GM may not always put investors first. Political priorities may trump their demands. Some worry GM will spend too much time and use too many resources working on small cars or electric cars and not enough on profitable vehicle lines like trucks and SUVs.
The stock offering "is entirely cosmetic," says Logan Robinson, a law professor at the University of Detroit Mercy who has worked as legal counsel at Chrysler and automotive supplier Delphi. "The government is absolutely going to call the shots, even if they are below 50 per cent."
Before handing over bailout cash, a task force convened by President Barack Obama wrote in contract provisions forcing GM to use the money in ways the government approved. Some of those provisions, including executive compensation and U.S. production levels, are locked in until 2014.
Even if the Treasury were to sell every share it owns in GM, its influence and power would remain. The top two executives, Mr. Whitacre and CEO Dan Akerson, were picked by the government. Three other directors, David Bonderman, Robert Krebs and Patricia Russo, were also chosen by the government to sit on the 13-member board.
"Where do these board members' and executives' priorities lie - is it with the administration, or is it with the shareholders?" asks Linda Killian, founder of Renaissance Capital, which analyzes and invests in IPOs. That question is "sitting there like an 800-pound gorilla, holding stock."
2 - YEARS OF FUZZY MATH STILL NOT FIXED
GM admits it doesn't have great control over its finances. It said so in a long list of potential risk factors spelled out in its stock registration statement with the Securities and Exchange Commission.