Get Ready for the 'New' General Motors


In the middle of last year, General Motors Company filed for bankruptcy and collapsed into the government's arms. With only $82 billion in assets and around $172 billion dollars in debt in 2009, General Motors made the call that the best decision was to file for bankruptcy.

At the time Chief Executive Frederick Henderson said the move would "... give us another chance ". President Barack Obama supported the idea saying that GM would emerge a "...stronger and more competitive " company over the next year.

After major restructuring, the company is now offering its shares to the public. The car company, which is still mostly owned by the U.S. Treasury, is expected to pull down $12 - $16 billion from an IPO.

This plan would come at a very high cost. After all is said and done, it could cost taxpayers almost $30 billion on top of the $20 billion already put into the company.

After some restructuring and scrubbing on its balance sheet however, General Motors appears to have emerged from the ashes as a much stronger company. It had not turned a profit since 2004, but has been able to put together two solid quarters in 2010. In the first quarter of this year, the company made $865 million. Second quarter results showed a $1.33 billion profit.

As of June 30, the company had $8.2 billion in debt with marketable securities and cash amounting to $31.5 billion. Most of its debt is due in 2015, which should give the company some flexibility over the next few years.

***With GM back on track and the auto industry gaining momentum, the company is confident enough to offer its shares to the public again via an IPO, although the rumor is that the offering may not actually be completed until October or November.

GM did not list the price per share, or the amount of shares for the public offering, but it is expected to be one of the biggest offerings in history since Visa's ( V ) $19.7 billion offering in early 2008.

Some sources say that specific share pricing for the IPO will only come out once GM gets closer to the offering date - in the meantime GM will try to get a better sense of market conditions, and overall demand.

The US Treasury currently owns around 60 percent of the company, and will look to offload enough shares to reduce its stake in the company to below 50 percent. Additional stock offerings are set to begin in early 2011, as the government tries to further reduce its stake in the company. Sound familiar? The government has been playing a similar game with share of Citigroup ( C ) .

GM plans to list the common stock on the NYSE under the symbol GM - no surprise there. More than 10 banks have already agreed to help with the offering. Among the big boys are Bank of America ( BAC ) , Goldman Sachs Group ( GS ) , and Morgan Stanley ( MS ) - each with a commitment of $500 million.

While the US Treasury, and other stockholders, will sell shares of common stock GM will not - a more likely scenario is that the company would sell preferred shares.

The key difference between these two classes of shares is that preferred stock functions more like a bond. Preferred shares come with a dividend (like interest on a bond), a redemption price, and possibly a redemption date. Generally they are more stable income investments since dividends on common stock can fluctuate. Additionally, holders of preferred shares come first in line to receive dividends in arrears if the company doesn't have cash on hand to pay out when the dividend payment date arrives.

***The situation with GM is just one more example of the government's involvement in the private sector. Some experts argue that a bailout for one of the largest car companies in the world was necessary. But who actually pays to give this company a second chance? You do.

The scenario is becoming all too frequent: massive multi-national company grows to reach 'too big to fail' status, executives make unsustainable financial decisions, company gets into trouble, company fails, government bails out company to avoid systematic failure, taxpayer bears the burden.

The issue of moral hazard is now received as a necessary evil - right versus wrong no longer seems to play a role.

The government is not supposed to constantly intervene and run the private market. In GM's case, the government gave the company a second chance and is now trying to reduce its stake in the company through stock offerings over the next few years. I sincerely hope that in the future we are able to all look back at this period in time and see it as a deviation from government's intended role - and not as the new normal.

For my part, I wouldn't mind seeing taxpayers receive a few shares of GM, and Citigroup for that matter, in their personal retirement accounts. If we bail these companies out, we should take part in enjoying the proceeds - if there are any.

The GM IPO should be one of the biggest in history. I'm not going to make a call on whether it's a good investment or not until I know more details. But I'd like to share a recent research paper my staff and I completed on the IPO market. It was written for SmallCapInvestor PRO members, but I thought you might enjoy it. You can read it HERE

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Stocks

Referenced Stocks: BAC , C , GS , MS , V

Wyatt Investment Research

Wyatt Investment Research

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