GM, as the undead creature formed by a government committee, having shafted its previous stockholders is attempting to shaft some new ones once again though its new IPO stock offering. The purpose of the IPO is to generate funds to pay off old loans and to give a value to the unions and other constituencies created in that financial debacle orchestrated by the Obama administration which circumvented all bankruptcy laws.
General Motors Co. will have to persuade investors to look past declining market share, less than a year of profitability and management new to the auto industry to buy shares in its initial public offering.
GM, 61 percent owned by the U.S., said yesterday its North America market share may fall by 2014, while the company has forecast earnings growth will slow in the second half of the year after a two-quarter return to profitability. The automaker must have a market capitalization of $69.4 billion after the IPO for the government to be able to break even on its investment, data compiled by Bloomberg show.
GM’s filing with the U.S. Securities and Exchange Commission yesterday laid out the challenges the Detroit-based company will face generating enough investor demand to complete an offering that people familiar with the plan have said may be as large as $16 billion.
“It will be a tough sell because the company has only posted two quarterly profits and the CEO is stepping down,” said Peter Jankovskis, who oversees $2.3 billion as co-chief investment officer at OakBrook Investments in Lisle, Illinois. “Those aren’t the normal types of things associated with an IPO that’s going to be highly subscribed.”
The company must be worth even more than the $69.4 billion for the U.S. to fully recover its investment if the bondholders and the United Auto Workers union exercise warrants and dilute the government’s stake, data compiled by Bloomberg show. That’s more than three times the value of GM’s equity at the end of the last bull market in U.S. stocks and 65 percent higher than Ford Motor Co.’s market capitalization of $42 billion.
Profit Forecast
GM posted profit of $865 million in the first quarter and $1.54 billion in the second quarter. Chief Financial Officer Chris Liddell said last week he expected earnings to moderate in the second half, without giving a specific target.
Recent economic reports have signaled the U.S.’s recovery from the longest recession since the Great Depression is deteriorating. Unemployment claims unexpectedly rose in the first week of August and sales at retailers increased less than forecast last month, reports showed last week. The Federal Reserve said Aug. 10 that the pace of recovery will probably be “more modest” than forecast.
“This is going to be harder than it would have been if the economy and the auto market were in better shape,” said Joe Phillippi, principal of AutoTrends Inc., a consulting firm in Short Hills, New Jersey. “Every week, people are ratcheting down their outlook for the economy and that will affect the price of this deal.”
Fleet Sales
GM and other automakers have sold more vehicles this year to rental and government fleets, which tend to be less profitable than retail sales. GM said yesterday that fleet sales were 32.3 percent of its volume in the first half of this year, up from 24.7 percent last year. Ford got 31 percent of its sales from fleets this year, according to Automotive News.
Such purchases will account for 25 percent to 27 percent of sales for the year, Liddell said last week.
Retaining its share of the North American auto sales also will be a challenge, GM said. The company now has 17.8 percent of the market and forecasts that will slip to 17.6 percent by 2014.
GM’s past dominance of U.S. auto sales has shrunk steadily since its market share peaked at 51 percent in 1962. Since 2002, when the company’s share of new vehicle sales in the U.S. was 28.4 percent, it’s fallen every year to just 19.2 percent this year through July.
The last time GM accounted for a smaller share of new U.S. vehicle sales on an annual basis was in 1925, according to data from trade publication Automotive News.
‘Public Perception’
GM said competitors have succeeded in poaching its customers because of a “negative public perception” of its products.
“It’s something they have been working on for a few years, said Rebecca Lindland, director of IHS Automotive, in Lexington, Massachusetts. ‘‘They’re starting to see some results, but it’s an ongoing battle for them.”
GM also may face a decline in the Chinese market, where the company is a top performer and highly profitable, AutoTrends’ Phillippi said.
GM’s second-quarter sales for the Chinese market fell to 586,000 from 624,000 in the first quarter. GM’s share in China fell to 13.1 percent in the second quarter from 13.3 percent in the first quarter, the company said last week.
New Management
GM flagged its new management team as a potential risk yesterday. Chief Executive Officer Ed Whitacre, 68, said last week that he would step down as CEO Sept. 1 and as chairman at the end of the year, ceding both titles to Dan Akerson, a managing director of the Carlyle Group. Akerson, 61, has been on GM’s board since July 2009 and previously served as chairman and CEO of XO Communications, Nextel Communications and General Instrument Corp.
In its prospectus, GM said the lack of automotive industry experience for Akerson, the company’s fourth CEO since April 2009, and Liddell, who previously CFO for Microsoft Corp. and International Paper Co., was a risk.
Steve Rattner, who led the Obama Administration’s Auto Task Force, said in an interview on Bloomberg Television that Whitacre should have stayed longer.
“It is not optimal for a company to have four CEOs in a year and a half,” Rattner said. “That is not best management practice.”
Some investors will be willing to shoulder the risk because GM has potential for greater profits and growth, said Michael Yoshikami, who oversees about $1 billion as chief investment strategist at YCMNet Advisors in Walnut Creek, California.
“It’s going to well-received by investors,” Yoshikami said. “People believe GM is coming back.”
He said he doesn’t plan to buy the shares for his firm because it’s not a conservative enough investment. Ha ha, better than saying its very stupid as a buy.
Wait till you see how many people do not buy the products it is being forced to sell like its 40 mile electric power car..??
WASHINGTON (MarketWatch) -- For those who are interested in buying General Motors once it goes public again, you won't be able to say you weren't warned.
The GM prospectus has plenty of scary material in it. Admittedly, every company does -- that's their lawyers' job. But there are plenty of factors worth giving pause to snapping up the company when it re-lists, above and beyond the larger concerns about the state of the automotive markets.
The first version of course doesn't list the price of the 500 million common shares it plans to sell. But in any event, those shares would be buying a company that earned $2.2 billion in the first half of this year on revenue of $64.7 billion -- a profit margin of 3.4%. Ford /quotes/comstock/13*!f/quotes/nls/f (F 11.93, +0.13, +1.10%) earned $4.5 billion on revenue of $59.4 billion, so it's more than twice as profitable.
Now it's no shock that Ford is in better shape than GM -- that's how Ford avoided bankruptcy in the first place. A Wall Street analyst could well say that GM has more upside, and that's undeniably true.
But look at all the balls GM is going to juggle. It's getting rid of 700 U.S. dealers and has axed four brands -- which, given other companies' experiences has led GM to conclude that "our market share could decline because of these reductions" from its current top position of 19% in North America.
GM is also worried that four years down the road, it may have to make "significant contributions" to its U.S. defined pension plan that was underfunded by $17 billion at the end of 2009 -- when the interest rates of corporate bonds were higher.
The old GMAC, now called Ally Financial, doesn't have the financing power of old; the vaunted Chevy Volt relies on battery power "that has not yet proven to be commercially viable"; the top two executives don't have previous automotive experience; and, not to be ignored, its controls over financial reporting "are currently not effective."
Just as with Ford, there are no dividends on offer, and while it's dumped previous healthcare obligations, new ones are coming on stream.
Now granted, GM's strong in China, has virtually no short-term debt obligations and has $31.5 billion of cash. But as GM has shown, cash can get burned up rather quickly.
Plus, there's the small matter of the economy on shaky footing.
Until the price is set, it's obviously impossible to say whether GM is a buy or sell. But investors may want to pause before joining the United States and Canadian governments and the United Auto Workers as co-owners.
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