GM currently appears determined to return to publicly-traded status this summer. An recent article on Edmund’s AutoObserver site discussed some of the current buzz around an IPO, and reports a rumoured valuation US$113 – US$137 share, which could make the stock offering worth around US$68 billion. That would exceed their previous best-ever valuation of around US$40 billion. A question that I keep coming back to, as do others, is why is GM intent on rushing into this? What is the hurry?
I believe that their rush to an IPO has 2 motivations. The first is that they currently have all the overhead and burdens associated with being public, but with none of the upside. The second is that it is the next step in getting out from under government supervision (and even control) and returning to autonomy.
All the Work, None of the Benefits
Right now, GM is a publicly owned company, since the majority of the shares are held by the governments of the United States, Canada and Ontario. The UAW does have a GM ownership position as well, as part of the VEBA arrangement. Early on, GM tried to imply that, as a “private company”, they wouldn’t be reporting the same way they did when they were public. The US government disabused them of that notion quite rapidly. So, GM has to do what it did before: report quarterly and annual financials, prepare all the required reports and filings, and undergo an audit every year. Basically, the same work they would have to undertake if they were publicly traded.
However, what they don’t have is the “publicly traded” part, where shares and options on shares would be worth something tangible. As I understand it, some executives are compensated in warrants or options on GM stock for the day when they do go public. But right now, those aren’t technically worth anything, because they can’t be sold. For GM to attract new executive talent requires that they rely on cash compensation as the primary incentive. The problem is that GM is limited in how much they can offer. Some of that limitation can come from TARP rules, but a lot of it comes from simple optics: if they offer what either the government or the public perceive is “too much”, you can expect a lot of public backlash and resistance. No potential recruit wants to face that kind of public backlash and scrutiny, and neither does the company.
If GM were publicly traded, they now have the option (no pun intended) of offering stock and/or options as part of the compensation package, and can keep the cash portion to a minimum. The general public seems less concerned when an executive is paid mainly in stock or stock options, since there is always the chance they could be worth nothing. Cash is worth something, all the time, and that gets people’s attention.
Return to Autonomy
The other element of their rush to an IPO is to return to some degree of autonomy, by allowed the various governments to sell their shares and get their money back. This goal was, I think, part of the motivation to use the escrow funds to pay back the cash portion of the bailout (remember, much of the original bailout was converted to warrants for shares in GM, plus other ownership conditions). I suspect their thinking was that, if GM doesn’t owe the government the money, the government won’t get as much of a say in what GM does and how it is run. By issuing the IPO, and giving the governments a chance to get their money back, it further removes them from government scrutiny.
While technically that may be true, practically speaking, it isn’t completely true. You can expect that the government-held shares will be sold over a period of time, and not dumped on the market in a matter of days or even weeks. That much volume hitting the markets will mean a steep drop in the price, since there will be a lot of supply compared to the demand. That means that the various governments will continue to be owners for some time, likely at least another year, possibly longer depending on how the shares perform in the market.
I would also expect that, for a year or so, the non-government shareholders that bought into the IPO will be watching GM more closely than they do their other holdings. Any missteps or bad decisions will be magnified for a period of time, and the new owners and the analysts will be all over GM. The result will be big swings in the price of the shares. I would also expect that, for the first few months, analysts and reporters will constantly remind people that GM was bailed out, etc etc, which colours whatever news comes out of the company. This effect won’t last forever, and I suspect that if GM can post a couple of decent quarters, it will die away.
The risk though, is that if things slow down again, GM is in trouble on two fronts. First, they had a bigger warchest (with the escrow funds) and they gave it way instead of sitting on it for another year. If GM continues to burn cash the way they are, then they could be back at government doorsteps looking for another handout. Depending on the economic climate, that may not have the same results as it did in late 2008 and early 2009. Any IPO they do in 2010 is a one-shot deal to repay the governments and raise more cash. If things go south for them, they won’t get a second chance. They could be forced to look to the debt markets, but would likely have to issue bonds rated at or close to junk, with the attendant high interest that comes with them. That assumes they could raise any debt at all. With no more government money, no way to sell more shares and no way to borrow, that means a GM that runs out of money and is, once again, back in bankruptcy, possibly looking at liquidation. Granted, its a worse-case scenario, but it isn’t outside of the realm of reasonable possibility.
They Need to Slow Down
Personally, I think GM needs to slow down, and stop rushing headlong into something that doesn’t need to happen right now. I also think giving up the escrow funds was a mistake. GM could have waited another year, patiently working to rebuild their market and build up their product image. It would give the industry a chance to truly prove that a recovery is underway. With better cashflow, a stronger balance sheet, and a suite of products that are proven to be winners (rather than “hope to be winners” like most are today), they could have an IPO that commands a bit of a premium. Instead, they are rushing into something that could end up being ill-timed and less valuable to them. There’s no rush. Slow down, rebuild and show proven numbers. Then an IPO will come. It will look better, and be better, as a result.