GM's push for IPO may be premature

By Bill Visnic
Senior Editor,

(July 2010) General Motors Co. CEO Ed Whitacre has been fond of saying the "new" GM's mission is one thing and one thing only — designing, building and selling the best cars and trucks in the world.

It hasn't taken GM long to stray from the cause, however. Barely a year out of bankruptcy, the company seems so concerned about making the case for its craved initial public offering that one wonders if, as with the GM of the past, the "building and selling world's best cars and trucks" thing isn't already losing its charm.

Certainly, GM needs to return to public ownership and get the U.S. and Canadian governments, not to mention its labor union, paid back and out of its business. But GM's increasingly unsavory prosecution of its IPO leaves it looking a lot like the bankrupt operation it left behind - a company concerned more with its internal processes and financial ministrations than with the products it makes.

AutoObserver has questioned since GM emerged from Chapter 11 a year ago this past Saturday why the automaker was in such a hurry to execute the IPO. Recent developments have made the move even more questionable.

First, it is apparent a full-blooded and unwavering national economic recovery is not happening. Expectations for a definitive auto-industry rebound have become equally deflated. And although the scale is hardly equivalent, the bumpy early results for the IPO of heralded upstart Tesla Motors does not send promising signals. Industry growth is slowing in China and GM is facing trouble in Europe that will take billions of dollars to fix.

Roll it all together and it's looking even more like GM is pressing the IPO at a time when it should be stepping back to re-evaluate.

It's been speculated the White House could be pushing GM's IPO for political gain prior to the critical November mid-term elections. The Obama Administration may give office-seeking Democrats a boost with the talking point that the much-criticized GM bailout is a "success" and the company is moving off the taxpayers' books. But some believe current economic forces could lead to a premature IPO that equally risks the blowback of failure - or at the very least, one that doesn't go far enough to ensure tolerable return on the $43 billion of GM common stock the federal government holds.

"This certainly is not the climate in which I'd want to have an IPO since it's likely to reduce the initial value of the stock," said CEO Jeremy Anwyl. "What's the rush - is the timing political so that the current administration can take credit for seeing it from start to finish?"

Or maybe it's personal. Word in automotive circles is that Whitacre and GM board member Steve Girsky, both recruited by the Obama automotive task force to run GM post bankruptcy, are in a hurry to do the IPO and get on with their lives. Whitacre had been retired from AT&T when the government came calling; Girsky was working on Wall Street.

At least one analyst told AutoObserver months ago, before the recent downward sag of the economy, that GM's rush for an IPO seemed "unbelievably premature," given the nascent information about the "new" GM's probable long-term financial health, among other things.

Some now are speculating that the receding economic recovery is in fact amplifying GM's desire to execute the IPO in order to grab whatever's on the table before anybody has much chance to look too closely under the hood.

Most rational investors would say that although GM posted a reasonable profit in the first quarter of this year, one quarter of results does not a turnaround make - nor does one run of comparatively successful new products mean the future holds more of the same. Combine that possible sentiment with flagging confidence in the broad economic rebound and the auto industry's own wobbliness in recent months, and the risk remains high that an IPO in this environment is unlikely to generate the best returns for the taxpayers.

"A few quarters of results makes the (GM IPO) more speculative, which might appeal to any high-risk investors who missed the Tesla play, but leaves money on the table for the taxpayer who will be stuck," for whatever GM fails to repay, Anwyl said.

And a continually moving target is GM's eventual offering price, which will effectively determine the valuation of the "new" GM. Some analysts believe GM will see top offering prices, but other financial-industry sources say many of the publicly discussed valuations seem optimistic, while one source said the hyperbole about GM's potential offering price is noticeably declining as industry sales fail to accelerate.

It is difficult to evade the suspicion that in the year since GM has emerged from bankruptcy, the corporate focus has not been on CEO Whitacre's stated singular goal of designing and building the world's best vehicles but on financial matters that have scant bearing on that process:

• Almost from the day it emerged from bankruptcy, executives spoke of the IPO and of GM's need to slide out of its government shackles. But too often, the context has not been of creating a stronger company with consistently successful products - in whatever time it takes - in order to assure taxpayer return. Instead, GM officials talk openly about making haste with the IPO to cure ills on such matters as federal oversight on executive compensation.

• Another rationalization for a speedy IPO has been that GM is losing sales because of the "Government Motors" stigma.

That damage has been done. And if GM still believes government ownership is a disgrace keeping customers away, one wouldn't know it from the rosy talk about sales every month, including almost constant reminders that GM's new models are selling so well it can't make them fast enough.

• GM is shopping for a $5 billion line of credit that it says might help pay down debt on its balance sheet and bolster it for a potential backslide in auto sales. That may be a prudent move, but at its most basic level, it seems like an all-too-easy reversion to former policies — it was unsustainable debt loads that helped cripple the former GM.

Assuming new debt to repay old debt might be an acceptable accounting play in this situation, but it doesn't have the sound of a company trusting of the financial vibrancy it claims or in the ability to break even at sales levels substantially below current rates. Despite offloading multiple billions in debt thanks to Chapter 11, GM now wants - or needs - to once again take on fresh debt. This is supposed to inspire investors to pay top dollar in an IPO?

"I don't believe it's about timing (of the IPO) per se," counters Senior Economist Rebecca Braeu. "I imagine GM needs capital on balance for business execution."

• Recent balance-sheet sleight-of-hand includes reporting earnings in a convoluted metric that conveniently factors out GM's still-considerable pension and other obligations for certain retirees. If GM's prospects are so strong, why not present the truth?

If GM needs fresh cash injections and funny accounting to tart itself up for Wall Street, it's not a stretch to conclude the company is pushing for an IPO largely to rid itself of government ownership as quickly as possible. That's a necessary endgame, but it should happen in a responsible timeline that attempts to maximize the public's return on its investment and assure the long-term health of the company.

Nonetheless, it's likely GM's IPO will happen as planned late this year — and yet could be successful. Braeu points to some recent industry analysis suggesting GM's balance sheet will be perceived as healthier than that of chief rival Ford Motor Co., which remains heavily leveraged.

"If this is the consensus during the IPO," Braeu said, "then it may do very well."