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
At the time Chief Executive Frederick Henderson said the move
give us another chance
". President Barack Obama supported the idea saying that GM would
"...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
$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
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 (
Goldman Sachs Group (
Morgan Stanley (
- 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
members, but I thought you might enjoy it. You can read it