GM's IPO, fuzzy math, and politics

Michael Rose

Dayton Business Commentary Examiner

Last week General Motors, the new GM, filed the paperwork for an initial public offering (IPO) of stock to be issued sometime this fall.

There has been a lot of local interest and fanfare regarding GM’s IPO. The interest comes from the fact Ohio was dealt an economic blow when GM restructured. Ohio had the second most GM dealerships closed (79) of any state and has three former factories vacant with for sale signs placard in empty parking lots. Aside from Detroit Dayton had as much influence on General Motors as any city. At one time Dayton was a thriving GM town with thousands of employees working at Moraine Assembly and Delphi plants.

The fanfare regarding the news comes primarily from people who supported the federal government’s intervention, into the auto industry, and they have taken liberties with their representation of underlying circumstances related to taxpayer money.

Last week the Dayton Cox affiliate newspaper editorialized if the government moves quickly to get rid of its majority stake in the new GM the critics won’t be silenced. They opined it is simply politics. They are wrong. It’s not about politics, it is simply about money.

Most Americans are leery of the government’s estimate the Treasury Department will be able to exit the auto industry whole, or even make a profit according to some cheerleading analysts. People have a right to be skeptical about the return on investment the government is telling them and being repeated by the “copy and paste” talking points media.

To begin with, the first $20 plus billion vanished into thin air. Many people forget in December of 2008 the Bush administration loaned GM $9.4 billion with an agreement to lend another $4 billion in February, 2009 with congressional approval. In February of 2009 the Obama administration released the agreed upon $4 billion to GM. In April of 2009 General Motors sought and received another $2 billion from the Treasury Department. In addition to the $15.4 billion infused into GM between December, 2008 and April, 2009 the government gave GMAC $5 billion in aid and gave GM a $1 billion loan to buy more equity in GMAC in an attempt to shore up the struggling financial arm of the auto manufacturer. In the middle of May, 2009 the Treasury Department gave GM an additional $4 billion to bring the total exposure of the taxpayer to $19.4 billion, not including the cash infused into GMAC.

On June 1, 2009, weeks after the last $4 billion infusion and GM worth less than $1 billion, the company filed bankruptcy–Instantly leaving the taxpayer with a negative return of 99%.

An additional $50 billion was put into the “new” GM with a combination of $8.8 billion in loans and $41.2 billion in direct investment equaling a 61% share of the company.  Within a little more than six months the total taxpayers investment into the firm exceeded $70 billion.

At the height of its market capitalization GM was worth slightly more than $60 billion. At that time it had more than a 30% market share. It also had Hummer, Pontiac, Saab, Oldsmobile, and Saturn as brands. GM owned a 20% stake in Subaru, 20% of Fiat, owned a controlling interest in South Korean auto manufacturer Daewoo Motor Company and owned Hughes Electronics.

GM’s peak market capitalization in 2000 coincided with the best year ever for total new vehicle sales. A total of 17.4 million new autos and light trucks were sold that year. Last year only 10.4 million new vehicles were sold. Through July, according to Motor Intelligence, the seasonally adjusted annualized rate for new vehicle sales is 11.54 million units–Nearly 5.5 million annual units less than the industry witnessed between 1999 and 2007.

After shedding and shuttering the above mentioned brands GM’s year-to-date market share is down to 19.2%. Last year’s market share was 19.5%. GM’s monthly market share for this past July dipped to 19%.

The cheerleaders and copy and paste media say the value of GM will be between $60-70 billion with net profits of $12 billion or more over the next several years. http://money.cnn.com/2010/05/18/news/companies/gm_value/index.htm

Right. They completely ignore the fact GM has a smaller market share in a market where total aggregate demand is down by a third.

Investors need to read the fine print ‘cause this stock (IPO) might come back to bite them. When the government stepped in last year and secured bond holders were passed over that wasn’t the only egregious action. While that received most of the attention another little known act occurred, and it was to pay back unions. When GM filed bankruptcy pensioners, existing and future, should have been transferred to the PBGC (Pension Benefit Guaranty Corporation) to receive their defined benefits. Those benefits are not nearly as generous as GM’s/UAW’s defined plan. For reference, Delphi’s defined plans are administered by the PBGC. Last year’s deal may have set up GM to fail again or at the least require billions more of taxpayer assistance.

According to a GAO report, http://www.gao.gov/new.items/d10492.pdf released this past spring, the “new” GM pension funding is already in the hole by a whopping $26.3 billion! The GAO estimates GM will have to contribute $12 billion to its pension fund in 2013 and 2014.

If you’re going to buy the new GM stock it might be best to day trade.

This story is found here: http://www.examiner.com/business-commentary-in-dayton/gm-s-ipo-fuzzy-math-and-politics