There’s no need to rush a GM IPO
By Rob Cox and Antony Currie
General Motors boss Ed Whitacre has put the pedal to the metal on the automaker’s initial public offering. Underwriters have been chosen and fees negotiated. To allow for a deal in the fourth quarter, a prospectus should come within weeks. But there’s no rush.
Whitacre may think a speedy IPO is a good thing. Having the U.S. and Canadian governments — as well as the United Auto Workers union — as GM’s biggest shareholders may be a lingering stigma for customers — though the Motor City manufacturer appears to have halted its sliding market share at just over 18 percent.
And until the U.S. Treasury is paid back the $43 billion it injected and converted into common stock as part of the Troubled Asset Relief Program, the company is subject to executive compensation restrictions. Not so for Ford Motor — the cross-Motown rival that forewent a bailout — and other global rivals like Toyota, Honda and Hyundai.
GM’s big shareholders have good reasons to want to exit the carmaker, too. President Barack Obama could show his capitalist stripes by extracting some cash. That’s particularly true after American International Group’s plans to pay back a chunk to the government were torpedoed by British insurer Prudential’s failure to buy its Asian business for $35 billion.
The UAW, which owns 17.5 percent of GM, would be better able to protect its members’ financial interests from the ructions of the auto business if it were less exposed to the company’s shares.
But to enable its current shareholders to cash out profitably, GM needs to convince the same private investors singed by last year’s bankruptcy to jump back in at a pretty rich price — an equity value of some $70 billion. The automaker is hardly ready for that.
True, fortunes have improved for GM and its rivals. The group made money in the first quarter this year, its first profitable one since 2007. And inside the company’s Renaissance Center headquarters, there’s a renewed spirit and a focus on producing cars that consumers want to buy — and selling them without excessive discounts.
But GM’s European business, Opel, is still losing both market share and money — $500 million in the first quarter. GM reckons Opel might break even next year, but the Greek crisis is likely to slow the continent’s growth for some time to come.
There are also some unanswered questions about GM’s strategy. It has sent conflicting signals about owning a financial services business like GMAC, the one it sold before heading into bankruptcy. GM needs to clearly state its intention to get back into finance or deliver a firm message that it doesn’t need to own the bank to sell cars. Anything short of that creates investor uncertainty.
GM’s top brass is mostly new, as well. While that is a positive given past stewardship, the ability of the team to work together, and with the rest of the automaker’s 200,000 employees, is still unknown. So too is Whitacre’s ability to manage a complex manufacturing business — something both Ford’s Alan Mulally and Chrysler’s Sergio Marchionne, also CEO of Fiat, had proven before heading to Detroit.
Some demonstrable success in turning out new products and in closing the quality gap with rivals wouldn’t go amiss before taking the company public. A year or so of solid profitability — rather than a fudgy metric like operating earnings before accounting for underfunded pensions — wouldn’t hurt either.
Finally, there’s the question about what to do with the IPO proceeds. It’s generally accepted that these would be used to reduce the current owners’ stakes. While understandable, GM may be better off issuing new shares rather than selling existing ones, whether to pay down debt, to set against its remaining underfunded pension and healthcare obligations, or to invest for growth.
That would show prospective private investors that the company was being run for the long term, not just to get the government off its back. Further cleansing of the balance sheet would also make GM a more attractive investment proposition.
But even with the right approach, the risks of an early IPO remain high. GM’s unresolved problems would still weigh on the value of the group, perhaps translating into a big loss for taxpayers. And if the underwriters stretch GM’s value in the IPO, it may perform poorly in the aftermarket, hampering future stock offerings.
GM needs one day to return to the public markets and distance itself from state ownership. But there’s no reason for Whitacre — or Uncle Sam — to rush for the exit.