Challenges Abound as GM Pitches Its IPO
By Michelle Krebs August 19, 2010By Nick Kurczewski
With the required papers now filed, General Motors' management will kick off a road show to convince potential investors to buy the automaker's stock in its Initial Public Offering. Their challenges are many, according to analysts and investment bankers interviewed by AutoObserver.com.
Topping the list of concerns about the GM IPO are timing and management. Does the timing of GM's IPO have more to do with politics than good business judgment? And after the constant churn of CEOS and other executives in the past year or so, is the current management team the one to lead GM into the future?
Timing Is Everything
GM's filing with the SEC did not say when the IPO would be launched, though speculation is that it will occur in the November-December timeframe. Analysts and investment bankers interviewed by AutoObserver.com contend timing is critical for a successful IPO.
And some are concerned the timing of GM's IPO is driven more by politics than good business judgment. The expected launch of the GM IPO coincides with the nation's mid-term elections when many Democrats are fighting for their political lives. Some supported the $50-billion government bailout that handed 61-percent ownership of GM to taxpayers who are none too pleased.
"Ultimately, one has to wonder if the drive to go public isn't driven by national politics," said John Calia, of West Palm Beach, Fla., and a managing partner of financial advising firm, Tatum LLC. "The incumbent Democrats might benefit from a partial buyout of the taxpayer's equity position in GM."
Calia points out that whether the timing of GM's IPO is right - or wrong - depends on which side of the fence you are.
"If you are a finance professional, you might say, no. The 'new' GM doesn't have a track record that's very long," he said. "GM seems to have a great product pipeline, but it would be beneficial from a valuation standpoint to demonstrate they can hit their product sales and margin targets before going to a public offering."
He adds that sales of vehicles like the Chevrolet Volt are a key element to the public's perception - with the public including Wall Street.
Indeed, a California investment banker who preferred not to be named contended now is not the right time for a GM IPO with GM having such a short track record of profits -- only two quarters so far -- combined with a weak economy and questionable government policies impacting the auto industry.
Another concern, points out Calia, is the use of proceeds from the IPO. GM's SEC filing notes that none of the proceeds from the sale of common stock will be for its corporate use; proceeds from the sale of preferred stock will be used to run the company.
"One has to wonder where the money is going. If the idea is to pay back the government, why would an investor be interested? As an investor, I would rather see the money going into marketing, R&D and product development," said Calia.
While Calia questions whether the timing is right for investors, George Magliano, New York-based director of auto research firm IHS Global Insight, said the timing may be right for no one but GM.
"It's right from the internal perspective of GM," Magliano told AutoObserver.com. "The timing got even better when GM issued that last tremendous quarterly report...it's a great jumping off point [for the IPO]."
GM, which emerged from Chapter 11 bankruptcy on July 10, 2009, earned $1.3 billion in the second quarter; it made $856 million in the first quarter. However, those profits came following $88 billion in losses since 2004. And GM executives acknowledged during the automaker's second-quarter results conference call with media and analysts the second half will not be as strong as the first half financially.
In addition, the macroeconomic picture remains cloudy. "The light vehicle market, the stock market and the economy are not very good right now," said Magliano. "We haven't seen anything in recovery of jobs or housing."
As a result, IHS Global Insight recently lowered its 2010 sales forecast to 11.5 million units, down from 11.8 million. The forecast for 2011 is presently at 13.2 million units, according to IHS estimates. Edmunds.com is sticking with its 2010 forecast of an even lower 11.3 million.
Acknowledges Matthew Therian, research analyst with investment bank Renaissance Capital in Greenwich, Conn., "a lot can happen between now and when the stock is ready to go to market."
Indeed, the economy, vehicle market and stock market could improve - or worsen.
Management Upheaval
Generally speaking, analysts and investment bankers interviewed by AutoObserver.com are encouraged that GM last week at least solidified who is in charge of the automaker for the foreseeable future.
GM Chairman and CEO Ed Whitacre abruptly announced he was stepping down as CEO Sept. 1 and as chairman in December. He is being replaced with GM board member Dan Akerson, another executive who came from the telecommunications business, not the auto industry. He becames GM's fourth CEO in the past couple of years.
"It's good to see that they've taken away some of the uncertainty regarding the CEO situation. This adds to a long-term sense of stability to the company," said Renaissance Capital's Therian.
Magliano agrees that GM -- and Wall Street -- needed a "long term CEO, and Akerson represents this." Akerson's job now is "convincing the financial community they have everything in place [for the IPO]."
But skeptics remain. And even GM's SEC filings note as a risk the unknown of GM's top executives, including Akerson as well as CFO Chris Liddell, recruited earlier this year from Microsoft and often mentioned as a potential GM CEO candidate in the future. Like Akerson, Liddell had no auto experience before joining GM.
While acknowledging that these days "it's almost a requirement that the new CEO be from outside the industry," Tatum's Calia said he has no sense of Akerson being the right outsider. "I'm curious to learn more about how the market feels regarding GM's new CEO," said Tatum's Calia. "Is there a sense that he's the right man for the job?"
Calia reiterates what many have said - that is, GM needs stable, consistent leadership as Ford has with CEO Alan Mulally. "Alan Mullally's success at Ford has changed the perception on Wall Street," he noted.
Challenges Abound
Beyond timing and management, GM faces many other challenges, surely to come up during the IPO road show. Among them are: dealing with the floundering global economy; returning GM's European operations to profitability; ditching the Government Motors moniker; managing massive pension liabilities; and generally luring customers back to GM showrooms; to name only a few.
Magliano said the "company image to the consumer" is vital, with "Government Motors" being such a political hot button. He contended uncertainty or outright distrust of the GM brand is hurting its sales. "A successful IPO could restore confidence at the showroom level," he said.
While much of GM's debt was wiped out by last summer's Chapter 11 bankruptcy, Tatum's Calia insists its long-term pension liabilities remain a problem.
"The restructuring of GM did not adequately address the long-term pension liabilities of the corporation," he said. "No matter how successful they are with fewer brands and fewer dealers to support, their pension obligations loom as their biggest problem for decades to come. "
The IPO Bet
Few analysts and investment bankers interviewed would even venture the prospects for GM's success for the IPO.
One suggested it could look like a success if GM issues a low-ball stock price and on the eve of the stock offering, raises the price saying demand dictates it as electric-car maker Tesla did recently with its IPO. GM has not revealed the estimated price per share of stock nor the number of shares to be issued. Indeed, investors who short the GM IPO stock could be the biggest winners.
However, long-term performance of the GM stock is even iffier as competition heats up. Struggling Toyota will be back in the game, and companies like Ford and Hyundai, that took advantage of GM being down and nearly out, continue to gain momentum.
Much of the success of the IPO depends on the road show, which will clearly demonstrate the sales skills of GM executives.
Nick Kurczewski is a New York City-based contributing writer for Edmunds AutoObserver.com.
Michelle Krebs, Edmunds.com senior analyst and editor at large, contributed to and edited this post.
Graphic by Mark Holthoff, Edmunds.com manager of customer support.
Photos by GM
The success of vehicles like the Chevrolet Volt will go a long way toward the success of GM's IPO and GM in general.
Dan Akerson becomes GM's next CEO and Chairman.
GM CFO Chris Liddell came from Microsoft earlier this year.
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