The General Motors IPO, the second largest ever, is arguably this decade's most hyped financial event. But it might also turn out to be this decade's biggest financial fiasco. Its timing is driven not by the financial needs of the company—or the interests of taxpayers who are poised to get royally screwed—but the election-year needs of the Obama administration.
The IPO will allow GM to sell a part of the government's share to investors on the open market. But floating an IPO now is the Obama administration equivalent of declaring "mission accomplished" after two months in Iraq.
It is true that GM is in better shape than it was last year at this time. It has had two profitable quarters in a row and earned $1.3 billion from April to June in contrast to $13 billion in losses the previous year. It has eliminated many superfluous brands, and its remaining product line is getting high marks on quality and dependability. It has done quite well in overseas markets, especially in China, where GM compacts such as Buick Excelle, Regal, and Chevrolet Lova have surpassed competitors.
But the company is by no means out of the woods. For starters, although it managed to negotiate lower wages and benefits from its unionized workers during bankruptcy last year, it did not get meaningful relief from its pension and health care obligations. That's because its bankruptcy was orchestrated by a union-friendly administration that changed the normal rules of the game that would have required GM's unsecured creditors—such as the United Auto Workers—to forgo most of their claims. That didn't happen in this case, so the company has unfunded pension obligations to the tune of $27 billion whose bill is due in 2014. Long term, this puts it at a major competitive disadvantage against its non-unionized overseas rivals: Toyota, Honda, Volkswagen, and Hyundai.
Investors might overlook this if the company were otherwise sound and on a growth trajectory. That, however, is not the case. Indeed, in its application to the Securities and Exchange Commission—which, guess what, will come through just in time to make an IPO possible before the November elections!—GM admits that its "disclosure controls and procedures and internal control over financial reporting are currently not effective." And this "could materially affect our financial condition and ability to carry out our business plan." Companies include all kinds of outlandish mea-culpas in their IPO applications to cover their derrières in the event of investor lawsuits. However, this one goes to the heart of the information that investors need to determine whether GM is a good investment, especially since it is going public after only two good quarters as opposed to the usual four. If GM can't guarantee its own numbers, how exactly are investors supposed to evaluate its worth?
Furthermore, GM's European Opel unit, which failed to obtain a viable bidder or a bailout from the German government, remains a cash-guzzler, having lost over a billion dollars since the company emerged from bankruptcy last year. Most crucially, however, J.D. Powers last week lowered its auto sales forecast for the rest of the year as well as 2011 because of worries of a double-dip recession.
All of this means that potential investors are likely to take a dim view of the company's prospects right now, making it nearly impossible for taxpayers who still have somewhere between $40 billion to $60 billion "invested" in it to come out whole. For that to happen, the Treasury's 304 million of the company's 500 million common shares would need to average $131 to $197 per share, notes Brad Coulter director at O'Keefe & Associates, a Michigan-based corporate finance firm. That would put GM's implied valuation at somewhere between $65 billion to $98 billion.
To understand just how absurdly high this is consider that Ford Motor Company has a market value of only $40 billion. "There is no rational reason for investors to choose GM relative to Ford right now," notes Francis Gaskin of IPODesk.com. But even if investors valued both companies the same that would still represent a 50% loss for taxpayers. It was always unlikely that taxpayers would ever recover their entire investment, but a more auspiciously timed IPO might at least have limited their losses.
Nor is the IPO's timing good for GM. The company is—rightly—eager to shed the sobriquet of Government Motors. So eager in fact that its outgoing CEO Ed Whitacre launched a campaign this spring misleadingly claiming that GM had paid back its government "loan" in full after returning only $6.7 billion. But even he thinks that the IPO is a dumb idea. He apparently wanted to wait until GM could command a better share price and then have the company go fully public at once instead of in several installments as per the current plan.
Whitacre expressed his misgivings at a recent Management Briefing Seminar in Michigan's Traverse City, according to Sean McAlinden of the Ann Arbor-based Center for Automotive Research. "And then 48 hours later he was gone," McAlinden says.
But Whitacre's departure won't change the risk--"a big risk in my mind," says O' Keefe's Coulter—that the IPO could turn into a PR nightmare for GM if its opening price is too low.
Even if the IPO turns out to be less of a disaster, the Obama administration's wanton disregard for both taxpayers and the company shows just how desperate it is getting to deliver some sliver of economic good news to angry voters ahead of the November elections. But its actions only bespeak the dangers of government bailouts. GM has a long way to go before it is truly back on its feet. It might make it—eventually—just as Iraq seems to have stabilized seven years after President Bush first declared victory. But as in Iraq, it will remain an open question as to whether the bailout was worth the risk and cost to taxpayers.