General Motors will try to sell itself back to private investors, but it will take a lot for taxpayers to be made whole.
You've probably heard about the General Motors IPO. Nope, it isn't the successor to the Pontiac GTO, GM's legendary muscle car of the 1960s. The initial public offering of stock in the new General Motors will be made sometime in mid-November.
This is stock in the restructured company that got bailed out by the U.S. and Canadian governments. GM got more than $50 billion from the U.S. government last year in exchange for 62% of its shares, and the Canadians chipped in nearly $10 billion more for another 12%.
Both governments will sell some of their shares immediately so that their respective taxpayers can begin to get repaid. Full repayment would require the new GM to have a total market capitalization of about $70 billion, which is nearly 30% more than the company's peak market cap of a decade ago.
That's daunting, but there's more. Ford Motor's total market value is only $41 billion, even though Ford didn't go bankrupt. And its first-half earnings of $4.7 billion were more than double the $2.2 billion earned by General Motors.
So how can GM be worth more than Ford? Especially since General Motors now has its fourth chief executive officer in 20 months and hasn't clearly explained its corporate strategy. It has also gone through multiple marketing chiefs and other key executives.
But maybe a hefty market valuation for GM, though probably south of $70 billion, isn't so implausible. The company had $8.2 billion debt on its books at the end of the first half, compared to $27 billion for Ford. Tens of billions of the old GM's debt were wiped away in the bankruptcy. Chapter 11 is great . . . if you're not a creditor.
Besides, if you're a potential investor in the new GM, it doesn't matter if the company's market cap is higher than Ford's. All that matters is that GM's stock appreciates from the IPO price, which hasn't yet been set.
General Motors is now profitable in a lousy economy in which U.S. car sales, though better than last year's, remain at multidecade lows. Car sales need only recover halfway toward their previous peak for GM (and Ford and Chrysler) to start coining serious money, assuming the company keeps its cost discipline intact. That bodes well for the stock, if the IPO price is reasonable.
But buyers might want a long-term warranty on the stock, like the warranties on some cars nowadays. One major threat to GM is its long-toxic relationship with the United Auto Workers union, for which both sides bear the blame. Abolished in last year's bailout were the worst abuses: the Jobs Bank that paid workers not to work, ridiculous medical benefits that no other Americans have, and many feather-bedding work rules.
It's unclear, however, how much the union's mindset has changed. The UAW's no-strike pledge at GM expires in 2015. The union's membership has shrunk by two-thirds over the last couple of decades, so it has a stake in reinstating inefficient work rules that will increase the number of dues-paying members.
The UAW's contract with Detroit's car companies is about as thick as the phone book in a medium-sized city. Only when the contract shrinks to the size of a pamphlet will investors know things have changed. The union contract should be attached as an exhibit to the offering prospectus, because it's so critical to the company's future.
Meanwhile, General Motors is only the first in line of what will be an automotive IPO parade. Sometime next year, probably in the first half, Chrysler and Ally Bank will follow. Ally is the former GMAC, the lending arm of General Motors, which required its own separate bailout last year.
GM executives and their bankers soon will start a multicity road show to sell the stock. There will be PowerPoint presentations, Q&A sessions, FAQ handouts, IPO documents, SEC disclaimers, CEO statements, CFO explanations and other alphabet-soup stuff.
A successful IPO will be welcome, but there's more at stake here. Hopefully GM will seize its new lease on life, the UAW will re-invent itself to become a partner instead of an impediment, and the taxpayers eventually will get repaid in full. Maybe that's an awful lot to ask, but anything less would be a deep disappointment.
