For IPO Investors, A Peek Under the Hood of the New GM

Wall Street has not seen an IPO from a U.S. automaker since the 1950s. But this year, the dry spell ended. A few months ago, Tesla Motors (TSLA) hit the markets. And now, of course, General Motors has filed papers with the SEC to hold its own public offering.

Those papers include GM's S-1, a prospectus over 500 pages long. Yet only a little more than a year ago, in June 2009, GM filed a very different document with the federal government: a Chapter 11 bankruptcy notice. At the time, GM needed $50 billion in bailout funds.

Much has changed between then and now. But is GM a fundamentally different -- and more viable -- company now?

What a Difference a Year Makes

As a private company, GM has had time to take tough measures to restructure its operations. For example, the company has consolidated operations (including its dealer network) and eliminated several brands, including Pontiac, Hummer, Saturn, and Saab.

GM was also able to unload various liabilities and bad assets. The net result is that GM is somewhat of a clean-slate for investors.

Given that this is the initial IPO filing, the transaction details have not been disclosed. Those will come in the next few months, as GM undergoes an SEC review.

The presumption is that GM will raise as much as $20 billion. This will be good news for U.S. taxpayers, since the federal government owns a hefty 61% stake in the automaker. Uncle Sam plans to sell roughly a fifth of its 304 million shares. It also looks like the United Auto Workers union will sell a portion of its 17.5% equity stake.

As for the underwriters, they include who-who's of Wall Street: Morgan Stanley (MS), J.P. Morgan (JPM), Bank of America's (BAC) Merrill Lynch unit and Citigroup (C). However, underwriter fees are expected to be lucrative because of the political sensitivity of GM's offering.

Preferred Stock and the Risks

Interestingly, GM plans to issue preferred shares, most likely to make the deal more attractive in the face of skepticism stemming from the company's high-profile failure last year. Preferred shares are a hybrid of common stock and debt. they typically have a nice dividend rate, but get priority in the event of a liquidation -- a feature that's likely to be attractive for major institutions and hedge funds. Investors will have an option to convert the preferred shares into common stock, but the details of that conversion have not yet been disclosed.

To be sure, GM is not out of the woods. Especially worrisome is the fact that, although GM spent decades as a public company, the IPO prospectus indicates that its financial controls remain inadequate. That could be the result of the disruption caused by bankruptcy, but whatever the reason, it is embarrassing disclosure for a company of GM's size and experience.

From a product and sales perspective, GM does appear to be on the mend, generating two consecutive quarters of profits of $2.2 billion. In fact, GM expects to have a profitable year.

That's particularly good news for IPO investors, many of whom are mostly interested in the short run. That also means it's likely GM's timing for an IPO will be spot-on.
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