Lessons to be Learned from the GM Experience (Part III, Post-IPO Edition)
By Glenn M. Watson
Back in June 2009 we began our series about General Motors in the aftermath of their bankruptcy announcement. We then did a follow-up piece in April 2010 on the take-away lessons for our own small and middle-market companies. Last week, just 16 short months after their declaration of bankruptcy, GM, in a widely covered and discussed atmosphere, executed the largest initial public offering of common and preferred shares issued to date. This transaction has been the talk of the town here in Detroit for two weeks, but what does it mean not only for GM, but for smaller supply chain companies, the equity markets generally, but also the value of an enterprise, and the role of the federal government in an ownership structure?
It makes sense to review where GM stands with respect to basic stock fundamentals. First, the company, after eliminating thousands of employees now has approximately 85,000 employees worldwide. However, GM also has 531,000 retirees; a ratio a bit better than the US Social Security system, but not much. Why is this important? It is important because the new GM, pre-IPO, still has a total outstanding pension obligation of $29,400,000,000. This is a staggering sum to get one’s mind around, and only $6 billion of the IPO is being used to reduce this obligation to $23.4 billion. Can this high pension liability be supported? It remains to be seen.
Second, in the wake of the collapse of the old GM, leaving the common shareholders and most of the bondholders with nothing, the federal government took 900,000,000 common shares for its bailout. In last week’s IPO, however, it only sold 412,000,000 shares, leaving the feds with more than half of their original position (in other words, they still own 24 percent of the company). If you followed the press coverage of the pre-IPO road show hype, the public seemed to be divided as to whether or not they would purchase a car with a substantial government ownership position. Is this concern valid? Can the past history of government-run enterprises be applied in this case?
I think it is fair to say all of us “car guys” liked the fact Bob Lutz came back to GM to help the company focus on product. The “Lutz” cars in the current lineup are now the backbone of company (Cadillac CTS-V, Equinox, Malibu, Cruz, plus a couple of Pontiacs that helped reinvigorate product design). All of the new cars being offered by GM are selling at higher prices than the old GM cars, allowing the company to make money for the first time since 2004. The open questions are whether a) is there enough capacity to continue to make money given the drastic reduction in both brands and offerings, and b) can GM make money in North America (an element that has been critical to past success of GM)?
Finally, now that the dust is settling on the IPO, is the trading price based on the core fundamentals of the new GM, or is it the result of pent up investor demand looking for an opportunity when there have been few since the financial meltdown? Is it a combination of both? What can we learn from this case that we can apply to our companies? Free Vector Advisors have been engaged in this conversation with our clients, and we would be pleased to discuss these matters with you.
