Who Is Buying the GM IPO?


GM is called “Government Motors” and not with affection. In a normal circumstance, GM would have gone bankrupt. The bankruptcy courts would have settled matters. Out of the dust, a new car company would have emerged in some form. There were enough assets there.

Instead, GM had the political clout to “get things done”. The Obama administration moved to protect the unions and screw over the shareholders and bondholders of the company.  This needs to be highlighted in all the hoopla over the “record setting IPO”.  The people that put up risk capital got screwed.  Would they have lost money if GM went through the traditional bankruptcy route?  No doubt.  That’s not the point.

The government picked the winners and losers in the GM bankruptcy-not a court process or orderly bankruptcy process.  That is not how a capitalistic society works.

“The unusual plan, which was detailed in a filing with U.S. securities regulators, would only need the approval of the U.S. Treasury to proceed since the U.S. government would be the majority shareholder of a new GM, the company said.

The flood of new stock issuance that could be unleashed has been widely expected by analysts who have long warned that GM’s shares could be worthless whether the company restructures out of court or in bankruptcy.

The debt-for-equity exchanges detailed in the filing with the Securities and Exchange Commission would leave GM’s stock investors with just 1 percent of the equity in a restructured automaker, ending a long run when the Dow component was seen as a bellwether for the strength of the broader U.S. economy.

GM shares closed on Tuesday at $1.85 on the New York Stock Exchange. The stock would be worth just over 1 cent if the first phase of GM’s restructuring moves forward as described.

Once GM has issued new shares to pay off its debt to the U.S. government, bondholders and its major union, it said it would then undertake a 1-for-100 reverse stock split.”

To further the oddity that capital markets are witnessing, the US Treasury is in a “quiet period” as mandated by the SEC. Management of companies are not allowed to make statements about the company when it is undertaking an IPO, or when it is making filings with the SEC. Just contemplate that for a moment. The US Treasury is in a quiet period……..

I went searching the internet for the assets and liabilities of the new GM. No deal book is available to the general public, even though taxpayers bailed them out. However, there is an SEC filing from November 10, 2010.  Bear in mind that accountants make judgements.  While FASB and Generally Accepted Accounting Principles (GAAP) dictate how to make those judgements, two accountants looking at the same numbers can reach different conclusions.  These statements were made to make GM look its best when the light was shining brightly upon it.  Not that you’d want to show all your warts when you were doing an IPO, but it bears keeping in mind.  It also is a good idea to hold that idea in the back of your mind when the government reports if it made a profit or loss on the transaction.  No doubt, government accountants will shade it to look really super.

Doing financial statement analysis is sort of informative.  However, looking at ratios that take into account any piece of the equity is fruitless.  Only 5M shares are shown on the SEC submission.  Doesn’t make sense to do them until after the IPO and we know how many actual shares are outstanding.  In the past few days, they have increased the amount of shares available.

Current ratio=1.17  Return on Assets=1% (Ford’s Current Ratio=2.13, ROA=5%)

Surely, once they are a public company these ratios will change.  GM was able to offload a lot of liabilities in bankruptcy.  You can find them at this link.  Rest assured, the assets far underwhelm the liabilities.  Traditional financial statement analysis is sort of pointless at this juncture.  GM probably needs to be analyzed more like a Venture Capital or Angel investment.  Financial ratios can be a guideline, but looking at the potential for the business and the competitive challenges and advantages it has are more informative.

Nothing in GM as a reconstituted company is much of a game changer.  They offloaded some liabilities.  They closed or sold some divisions.  But, philosophically, they are the same company as they were before.  Just a better balance sheet, and smaller.  The achilles heal is their union contracts.

One competitive advantage they will have is that their largest shareholder is also the US government.  They will get favorable rulings from the government.  For example, it looks like GM will be able to avoid paying taxes (like other government employees) for years.

Excerpted from the Wall Street Journal,

“Usually, companies that undergo a significant change in ownership risk having major restrictions put on their tax benefits. The U.S. bailout of GM, in which the Treasury took a 61% stake in the company, ordinarily would have resulted in GM having such limits put on its tax benefits, according to tax experts.

But the federal government, in a little-noticed ruling last year, decided that companies that received U.S. bailout money under the Troubled Asset Relief Program won’t fall under that rule.

The Internal Revenue Service has decided that the government’s involvement with these companies, both its acquisitions plus its disposals of their stock, means they should be exempt” from the rule, said Robert Willens, a New York tax consultant who advises investment banks and hedge funds.

The government’s rationale, said people familiar with the situation, is that the profit-shielding tax credit makes the bailed-out companies more attractive to investors, and that the value of the benefit is greater than the lost tax payments, especially since the tax payments would not exist if the companies fail.”

Not paying taxes on profits sort of gives GM a competitive advantage over other car companies.

Some interesting notes. GM disposed of GMAC in the reorganization.  It is now called Ally Capital, and New GM holds a small stake in it.  But, they acquired Americredit Corp..  In the note they show how Americredit might affect GM, but because the transaction occurred in October they indicate they have no idea how it will affect GM results.  This is not a cause for alarm, since most financing arms of automakers are profit centers-assuming all they do is initiate loans for autos and trucks.  GMAC (Ally) got in trouble because it decided to go into the home loan business as well!

This jumps out at me.  “Although our U.S. and non-U.S. pension plans were underfunded by $17.1 billion and $10.3 billion on a U.S. GAAP basis at December 31, 2009, a hypothetical valuation as of September 30, 2010 projects total contributions of $0.6 billion to U.S. pension plans through 2013.”  My guess is that the new owners of GM, the unions, won’t be underfunding pensions.  A lot of the cash flow from the company could go directly into that activity-not paid to shareholders as dividends.  In the management discussion, point out that the GM pensions are “defined benefit”, not “defined contribution”.  This is not any different than a government pension.  Pensions could kill GM.

It’s worth remembering the government Cash for Clunkers program which artificially juiced up sales.  This program was from Jul 24, 2009-August 24, 2009.  CfC increased sales in the short term, but pulled sales away from the future.  GM is going to be highly dependent on the economic environment in the US.  If the economy and unemployment improve, GM should benefit. If we stay static, or get worse, GM will not grow.

The other funny thing is after this IPO is done, GM will still be “Government Motors”.  After all, the US Treasury will still hold a big chunk.  GM’s road show didn’t go to traditional investors.  Instead, it toured the world and presented to sovereign wealth funds.  After all, these funds are just arms of foreign governments.  Instead of the US owning it, they are “spreading their risk around” to other governments.  Hey, Joe the Plumber, how do you like those apples?!

As I said in a previous blog post, Shorting GM may be one of the best shorts in IPO history.

In recent days, Ford has benefitted from GM’s increase in IPO price.

F Stock Chart by YCharts

tip of the hat to Finance Trends, thanks for the link!


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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