GM auto workersDave Kaup
General Motors is about to take the next step towards the goal of shedding its current status as the ward of governments. The journey began on July 10, 2009 when it emerged from bankruptcy protection - albeit with the U.S. government controlling a 61 per cent stake in the company and the governments of Canada and Ontario owning a combined interest of 12 per cent.
As part of the process of losing the "Government Motors" moniker, the company is scheduled to offer its shares to the investing public with an initial public offering (IPO). The money raised will only pay back a portion of the $50-billion (U.S.) the U.S. government invested in the bailout of the once mighty automaker. How Canada and Ontario will proceed has not been reported. According to comments made by GM chairman Ed Whitacre, shares are expected to begin trading in mid-November, with pricing in the $20.00 to $25.00 range.
If market conditions and investor interest meet expectations, the issue will be the third largest IPO in U.S. history. The largest U.S. IPO was the $19.7-billion that Visa raised in March of 2008, followed by the $10.6-billion in stock AT&T Wireless sold in 2000.
General Motors has scaled back its expectations from what was first seen as a $16-billion issue to a more modest $8-billion to $10-billion offering. This year has seen over 45 companies retract or scale back their first stock sales to the public in the face of what is an improving - but far from strong - market for new issues.
In an effort to market the IPO, investment bankers have approached sovereign wealth funds from the Middle East and Asia. Some of these funds are seen as long term, patient investors whose primary investment goal is to diversify their holdings.
GM's partner in China, SAIC Motor Corp., has been identified as an interested buyer, although its appetite is expected to be less than 1 per cent of the issue. Some see SAIC's interest as more of an expression of support for their partner than a real hunger for the stock. GM has set aside 5 per cent of the issue for employees, retirees, dealers and others within the corporate family.
According to estimates, the math on the offer indicates that, if the U.S. government wants to recoup its investment, the shares of GM have to average in the range of $131.00 on the issue of 500 million shares. The pricing suggested by Whitacre suggests that the shares will be split, which is the same manoeuvre Berkshire Hathaway used in its takeover of Burlington Northern.
What the economy suggests
Now that we have tallied all the information about the impending issue, we should review best practices in investment management. The first level of analysis is to examine the health of the general economy, the consequences for the specific business sector, and the prospects for the specific company.
Unemployment can serve as a useful proxy for the health of the general economy, recognizing that consumer spending contributes between 60 per cent and 70 per cent of gross domestic product in the United States. Unemployment in the U.S. is forecast to be over 9 per cent for the period 2009 - 2011. The last time that happened was during 1939 through 1941. High unemployment is not a great indicator of robust consumer spending or future economic performance.
The second level of the analysis is an examination of the auto industry. New vehicle sales have suffered greatly over the last number of years, and although there has been some recovery in 2010, they are still no where near pre-recession levels. Some estimates for light vehicle sales in 2010 have reached as high as 12.3 million vehicles. To put that number in perspective, new sales have more typically been closer to 16 million vehicle sales annually over the better part of a generation.
Finally, we want to study the case for the specific company into which we are considering investing our money. On a year-to-date basis, GM has seen its market share fall 0.6 points to 19 per cent. The big picture for GM tells the story of a company that has been shedding market share since the 1970s. Another factor investors should take into account is management's ability to create shareholder value. Management at the company has been rather fluid over the last two years, with four executives sitting in the CEO's chair over the period.
The conclusion
From the analysis of the situation, the case for an investment isn't what I would call compelling. GM "ain't no oil painting" as we used to say out west. However, the bottom line is that there is a lot of motivation for the U.S. government to make the IPO work and sell some of its investment in the rescue of General Motors with the right optics.
I think that the IPO will pop after the shares begin trading just like Air Canada's shares did after it emerged from bankruptcy. I don't see GM as a buy and hold investment, so if you decide to step up to the offer make sure to take profits when available. This IPO isn't likely to be another Google.
Lou Schizas