Yesterday GM formally started the process of an initial public offering. Anyone hoping for details will be disappointed as the important stuff like the exact timing, shares offered, cover price, etc. remain TBD.
Still, this clearly will be a huge IPO--the second largest ever. But what should we make of it all?
This IPO, like the bankruptcy last year, is highly unusual, and for the same reason: Government involvement. This is important because it means that weighing the competing interests associated with the IPO becomes a lot more complicated.
A normal IPO is straightforward. Either the company is looking to raise cash for operations, or shareholders are looking for liquidity, or both. Both are financial decisions and both are clearly true for GM. Most notably, the UAW needs to liquidate shares to fund their VEBA (health care) trust.
But Ed Whitacre has gone on record as stating that the company is eager to shed the moniker "Government Motors." This is a marketing issue. (And one that is over-rated, in my opinion.)
And the government wants a successful GM IPO to be able to claim that the auto industry bailouts were a success. This is a political issue.
These issues are not aligned and this is most clear when it comes to the timing of the IPO. To me this is the real question. Why now?
GM has made real progress in in the past year. From a taxpayer perspective (taxpayers being yet another stakeholder group) the IPO should be timed to maximize stock value and create a pathway for taxpayers to recoup (or even profit from) their investment.
This should be the overriding consideration.
I spoke with an investment banker to get an insider's view on timing. His first point is that two quarters is not long enough to establish that GM's turnaround is real and enduring. Several more quarters would be ideal.
His second point is really relevant to this situation. He said that under no circumstances should a company go public if there is a chance that the company's financial results after the IPO would fall below the quarter prior to the IPO. GM has already stated there is a like real likelihood that 3rd and 4th quarter results could drop below that of the 2nd quarter.
Finally, he said that the usual strategy is to announce a low cover price to drum up demand during the pre-IPO "road show" and to then announce a higher price the night before the offering, citing unexpected demand. We will have to stay tuned on that one...
Through the upcoming filings we will be able to see how GM is balancing the unusual and competing interests associated with their IPO. Should be interesting to watch.
