Monday, August 16, 2010

General Motors IPO—A Financial Opinion

General Motors has been making a good recovery and has some great new cars, with the possible exception of the Chevy Volt (see NY Times article below). However, from my financial point of view, it is ridiculous to take the company public right now. This move is political, not financial, and is related to the coming mid-term elections, not the financial viability of General Motors.

For those readers who have not read my previous posts calling for and commenting on the General Motors bankruptcy, over the last several years, please take a look at what I had to say on the subject in March 2006: and June 2009: .

Of course, when the bankruptcy finally occurred, several constructive things were enabled, including a restructuring (sort of) of the dealer network and pension/healthcare obligations, as well as the renegotiation of union contracts. Of course, no lender could have been expected, under such dire circumstances, to provide debtor in possession (DIP) financing, as is the norm for Chapter 11 bankruptcies, which proceed through the courts to reorganization, with new shareholders etc. Instead, the U.S. Government invested $50 billion and received a 60% equity position and the Canadian government invested $10.5 billion and received 12.5%. We know the U.S. government had a loan outstanding of about $20 billion, before the bankruptcy, and it’s unclear to me what became of that loan. Earlier this year, the company, with an announcement that made it sound like they were repaying the government’s entire investment, repaid $6.7 billion. Perhaps I’m missing something here, but the remainder of that loan does not seem to appear on the company’s most recent balance sheet, so it is presumably part of shareholders’ equity.

What is quite clear, however, is that, after announcing earnings of $2.6 billion and free cash flow of $3.8 billion, for the six months ended June 30, 2010, General Motors’ balance sheet shows total cash and marketable securities of $33 billion and total shareholders’ equity of $23 billion. So, what happened to the other $37.5 billion of the U.S. and Canadian governments’ roughly $60.5 billion in capital investments in the last year? One can only assume that these new capital investments, like all other capital invested in General Motors historically, have been dissipated.

And this company, with its ongoing record of capital destruction says it’s going to launch an IPO to repay the government? Remember, if they repay the government, they will not retain the proceeds from the offering. They will have only the cash they have right now, plus future cash flows, to operate the company going forward.

Indeed, on August 5th, the New York Times reported GM CEO Ed Whitacre saying: “We want the government out, period….We don’t want to be known as Government Motors.” The Times went on to say, “Through its sponsorship of the automaker’s bankruptcy last summer — including more than $50 billion in loans — the Treasury Department holds about 61 percent of G.M. Analysts have been expecting G.M. to sell part of its shares during the initial offering, but Mr. Whitacre said the company anticipated selling them all at once.”

Really? Do you suppose he is talking about the whole $60.5 billion or just the $23 billion that’s left? Let’s take a look at how that would work. The nation’s big underwriters (at least who’s left) are supposedly vying for the privilege of selling the new GM IPO (read vying for the big underwriting fee to be paid from the proceeds). So, Goldman Sachs, JP Morgan Chase, Morgan Stanley etc. would take GM’s executives on a worldwide road show to hype the company’s terrific products (some really are but not the Chevy Volt yet; see below) and how they are making a big profit, while still being propped up by the US and Canadian governments’ $60.5 billion (or what’s left of it).

Here’s a NY Times article on problems with the Chevy Volt:

If GM succeeds in raising equity capital (and they probably will to some extent), these new investors will be committing capital to equity, which carries the highest risk on the very risky balance sheet of a company that still appears to be destroying capital investments. To clarify my point, consider this: Would these same investors be willing to buy the long-term debt of General Motors, i.e. 20 year bonds with a legal promise to pay and a fixed interest rate? Very unlikely, because these investors are not planning to stick around to find out how GM eventually works out. What will likely happen, assuming the hype is strong enough and the talking heads bob around enough when the IPO occurs, is that the original investors will engage in the “greater fool” syndrome, flipping the stock to the next fool and the next fool, and so on, until someone holds the stock for the long term and takes all the risk of loss. There has been a recent lesson in this regard, with the Tesla Motors IPO, several months ago. The stock initially jumped, allowing the original fools to flip their stock to the greater fools. However, in this instance, the next fools in the series didn’t appear and the stock tanked. Perhaps that will happen here, as well.

Please don’t misunderstand me here. I believe that GM is definitely on the mend, with many good new products and a much-needed cultural change underway. However, in my opinion, it is too soon for the company to be selling stock to the public. For all intents and purposes, the company is technically bankrupt, still relying on the government to prop it up. If it could really stand on its own, the company should be able to access the bond market and borrow substantial amounts of money for its day-to-day operations, with the government’s equity ownership essentially serving as collateral. That is clearly not the case and apparently not what the government wants. They want a political solution, before the mid-term elections. That, unfortunately, could do a great disservice to the taxpayers, the equity markets and the company itself. We have heard, in just the last few days, from a financially astute, potential GM customer, who has decided against buying a new GM product for fear of the company’s failure to survive the government’s current manipulation of their financial situation.

Finally, there has been a very significant announcement, while I was writing this blog post. The Chairman and CEO of GM, Ed Whitacre, has unexpectedly resigned as CEO, effective September 1st , and from the board effective at year end. He is to be replaced by Daniel Akerson, who has been CEO of one failed company (XO Communications) and one relatively unsuccessful company (Nextel); hardly the credentials necessary to run GM, especially not in the midst of a critical IPO.

Question: Why would Ed Whitacre (or any CEO) suddenly resign right at the beginning of one of the biggest IPOs in history, unless there is something wrong? Answer: There probably is.

Stay tuned.

Jack Falker

August 16th, 2010

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