Now GM, Feds Backing Off Expectations for IPOBy Bill Visnic September 24, 2010
After breathless early estimates about the size, scope and dollar amount of General Motors Co.'s pending initial public offering, reports this week indicate GM and the U.S Department of Treasury, which owns 60.8 percent of the company, are downshifting their expectations and reportedly will end up settling for an IPO that may initially generate as little as half of the $16 billion or more originally targeted.
General Motors executives have been on a "road show" to sell the IPO to banks and financial institutions, but the new reports saying the size of the IPO will be significantly downsized could be an indicator that Wall Street is subjecting GM to tougher scrutiny than the company or its Federal owners may have anticipated.
Since GM's IPO announcement, there has been repeated speculation about how investors would value the company, the primary determinant of how each share of the soon-to-be-publicly-owned GM will be priced. The Treasury Department's ownership stake, plus the 17.5 percent of GM equity owned by the United Auto Workers union and the remainder of GM debt currently equals about $70 billion - so an IPO generating the $8 billion to $10 billion now being discussed would retire only a small portion of the $49.5 billion GM needs to repay the Treasury Dept. - i.e. the American taxpayer.
Cooler Heads Prevailing?
In June, several investment banks jostled for the chance to be underwriters of the IPO but the new, lower target for the offering will cut into the already meager underwriting fee dictated by the Treasury Department. And with a seemingly realistic new appraisal of what GM's IPO might be expected to generate - it once was projected to possibly be the largest or second largest in U.S. history - the prestige factor of underwriting the deal also is taking a hit.
But almost from the beginning, some auto-industry and Wall Street analysts questioned many of the assumptions behind the originally projected size of GM's IPO, not to mention the seeming hurry to get the deal done. Soon-to-be-replaced GM Chairman Ed Whitacre repeatedly has said one of the company's overwhelming priorities was to eliminate the Treasury Department's ownership portion of GM as quickly as possible because the derisive label of "Government Motors" was hurting GM in the market and affecting company morale.
But now the lower target range for the size of the IPO indicates there may be a new focus on actually repaying the government in full rather than the speed of that repayment. Incoming CEO Daniel Akerson recently made a point of cautioning it might be years before GM can sell enough stock to the public to completely buy back the government's equity in GM.
It's also possible that feedback from institutional investors is guiding the suddenly downplayed IPO projections. GM sales are beginning to temper, lagging many of its major competitors as the auto industry struggles to make sense of a still-erratic recovery and markedly lower sales volumes. General Motors - not to mention potentially wary investors - also have to come to grips with what is certain to be lower market share than the company traditionally has enjoyed.
Although bankruptcy enabled the company to offloaded a huge portion of its debt, GM's market share is hovering near historic lows and is unlikely to improve significantly for the foreseeable future after it moves forward without the sales volumes once contributed by the now-defunct or sold-off Pontiac, Saturn, Hummer and Saab divisions.