Is General Motors Rushing Its IPO?

Here it comes: According to several reports in recent weeks, General Motors is expected to file registration papers for its upcoming IPO very soon -- any day now.

While Tesla Motors' (Nasdaq: TSLA  ) recent IPO drew a lot of attention, that was small potatoes in comparison to what's coming. GM's initial public offering is expected to be one of the biggest in history, possibly the biggest. And as we all know, it comes with one heck of a wrinkle: The U.S. government owns 60.8% of GM, acquired as a condition of the company's $50 billion bailout in 2009.

Paying back The Man
Of course, GM has already famously "paid back" some $6.7 billion of its government loan. Officially, there's no remaining balance -- the rest of the loan was covered by the GM stock held by the government -- but the public won't be likely to consider themselves truly paid back until that entire balance has been returned to the U.S. Treasury. Meanwhile, the "Government Motors" stigma will continue.

Given continuing uncertainties in the stock market, the economy, and GM's businesses, one might wonder whether GM would be better off waiting a while longer before re-entering public life. But all indications are that GM's management is extremely eager to be done with U.S. government ownership, and determined to go forward with the IPO as soon as possible.

Why? And will this end up costing them (and us) in the long run?

What's the rush, guys?
What GM is actually expected to offer is a portion of the U.S. government's stake; as much as a third of its 500 million shares, according to some reports. The offering itself, which is being underwritten by JPMorgan Chase (NYSE: JPM  ) and Morgan Stanley (NYSE: MS  ) -- for a fraction of their typical fees, presumably as a public service of sorts -- is said to be likely to take place this fall, before the midterm elections in early November.

But why? Why not wait a year or two, to give the economy more time to recover and GM more time to refresh its product line? Isn't it in GM's best interest to make sure the government gets the highest possible price for its shares?

GM CEO Ed Whitacre and CFO Chris Liddell might have come to the company from outside the auto industry, but they're no dummies. While I think the desire to transcend the "Government Motors" stigma is part of the calculation, I think there's something bigger going on: a reluctance (maybe even an inability) to make big, daring investments while the government is looking over management's shoulder.

Going from good enough to great
Make no mistake: The ability to make big, daring investments is critical. Restoring GM's long-lost luster -- really restoring it -- is going to require some big-time investments in products, platforms, and technologies that might not pay off for years.

Consider: A recent Car and Driver report suggested that Whitacre himself was pushing for a "flagship" for Cadillac -- a big, brash, powerful, and expensive sedan that would be competitive with the top-line offerings from Mercedes-Benz and BMW and re-establish Cadillac as, well, Cadillac. Developing such a car will cost big bucks, and there's serious risk involved: What if it flops?

Whitacre apparently thinks that Cadillac (and GM) needs such a car, that it would be the kind of dare that GM should be taking, and I think he's right. But that's exactly the kind of vehicle -- expensive, financially risky, and not likely to be particularly green -- that's hard to justify when you feel like the money you'd be spending belongs to the American taxpayers. Sure enough, a follow-up report from the GM Inside News blog suggested that GM's management would wait until after the IPO before giving formal approval to the mega-Cadillac's development program.

While this Cadillac would be a niche product, GM is almost certainly holding off from approving other ambitious investments, the kinds of programs it needs to go from making "good enough" cars to best-in-the-world products. Meanwhile, Ford (NYSE: F  ) and Toyota (NYSE: TM  ) can throw significant weight behind these kinds of programs right now.

In that sense, GM's best chance of paying us back might involve going public as soon as possible. Once the government has sold enough shares to lose its majority-shareholder status, GM's management team will be able to swing for the fences. If they're as on-the-ball as they seem to be, all of GM's shareholders could be very well rewarded in coming years.

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Fool contributor John Rosevear owns a Cadillac and thinks it's pretty cool. He also owns shares of Ford, which is a Motley Fool Stock Advisor selection. You can try Stock Advisor or any of the Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (18) | Recommend This Article (5)

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  • Report this Comment On July 13, 2010, at 4:42 PM, BMFPitt wrote:

    I say we take what we can get while there's still something left. We're never going to break even (in real dollars, at least) so let's just cut our losses.

  • Report this Comment On July 13, 2010, at 4:54 PM, plange01 wrote:

    GM the bankrupt disgrace will be closed by the end of this year....

  • Report this Comment On July 13, 2010, at 5:01 PM, TMFMarlowe wrote:

    plange01, you do keep saying that. For the record, I'm quite happy to take the other side of that bet.

    Thanks for reading.

    John Rosevear

  • Report this Comment On July 13, 2010, at 5:13 PM, ragedmaximus wrote:

    usually with an ipo it can go 2 ways .1 profit from ipo .2. Bagholders getting a spark plug shoved up the but. I might throw a few bucks for the 1-2 day pop like tesla did but with gm I don't know will it be overpriced or underpriced?

  • Report this Comment On July 13, 2010, at 5:31 PM, TMFMarlowe wrote:

    @ragedmaximus: It's hard to say where it'll go short-term, possibly more so than with the average IPO. Long-term... it'll depend on whether this management team can execute. Early signs are very positive, but we'll see.

    Thanks for reading.

    John Rosevear

  • Report this Comment On July 13, 2010, at 7:02 PM, PeyDaFool wrote:

    "spark plug shoved up the but."

    Is that really necessary, maximus?

    :]

  • Report this Comment On July 13, 2010, at 7:15 PM, Flishiz wrote:

    The real question is why there is a disconnect between the government's motives and GM's. If there's anything that more than just the BRIC nations are showing, it's that cooperative, SOE-based large corporations are huge outperformers because the private industry can make big bucks while the government's sloshing pockets of cash provide huge investment. What's not to like? Perhaps if the government struck a tone between Bush's birthday video to Enron and Obama's antibusiness punishments, from the pay czar to the drilling moratorium, then we'd me moving on a track where growth of big business is good for a large government that can regulate and control it in more ways than heavy-handed (or loophole-filled) laws and reforms.

  • Report this Comment On July 13, 2010, at 8:58 PM, baldheadeddork wrote:

    Does anyone seriously think Ed Whitacre is being motivated by a Cadillac halo project? That's the kind of brain-dead thinking that Old GM shoveled out through the car magazines for years.

    Someone remind me: How has Toyota done over the years without a grandstanding halo car for Lexus? How did that whole Maybach thing work out for Mercedes? Volkswagen's results on Bentley has been...a thirty million euro loss over the last three years.

    Cadillac - and the rest of GM - need world-class cars at every segment they compete in. "When Cadillac was Cadillac" means "When Cadillac was a horribly-engineered, miserable-driving car you were embarrassed to be seen in" for every person under the age of 80. If GM wants to amaze car buyers, they can start with a Chevy lineup that stands toe-to-toe with Honda. GM needs to track down every person in the company hanging on to this "Hey kids, let's put on a Motorama!" thinking and fire them on the spot.

  • Report this Comment On July 13, 2010, at 9:19 PM, TMFMarlowe wrote:

    baldheadeddork, give me a break. It's called an "example", one that happened to make it into the public arena. Do I think the IPO is motivated by that Cadillac? No. Do I think there are other bigger investments that aren't being made because of the government ownership situation, and that that's a big part of what's driving the rush to market? You betcha.

    John Rosevear

    ps: Lexus has a comparable "halo" car... it's called the LS. Mercedes has one called the S-Class. Perhaps you've heard of them, or the BMW 7 Series, or the Audi A8. Cadillac doesn't have a car like that, and it needs one, if only to follow up the stretched STSs they're (successfully) passing off as top-line cars in China.

  • Report this Comment On July 14, 2010, at 10:58 AM, baldheadeddork wrote:

    I was cracking on C/D and the Motown culture who always thinks behaving like the Big Three did in the 50's and 60's is the answer to their problems today. Sorry for giving the impression that it was aimed at you.

    But speaking about you…This "example" would be a lot more powerful if anyone had one real example of the government blocking or even objecting to a product development plan. People have been shouting about this red herring since the bailout and it just hasn’t happened. Big, bad government hasn't told GM to kill the ZR1 or the Escalade, and it hasn't shut down development of the C7 Vette, so what on earth other than your preconceptions leads you to believe so strongly that a new large luxury car platform would be stopped by the bureaucrats? It's total BS, doled out because it plays right into the mindset of the people who are writing about it.

    I strongly disagree that the LS, 7-series and S-class are halo cars. That's just a full size luxury segment, and it's what the upcoming XTS better be able to compete against. (It should also be noted this is the $60-90K price range, which GM already sells in.)

    What C/D, people like Peter DeLorenzo, and the GM old timers are talking about is a production version of the Sixteen - a moonshot car that would cost well over $150K (in today's dollars), have very little shared engineering with other GM products, and would compete above the existing full size luxury class. The thinking is that this messiah car would be so amazing that it would erase the decades of bad feelings and experiences people associate with Cadillac _and_ GM.

    The problem is, it doesn't work. With maybe the single exception of Rolls Royce, every luxury automaker that has successfully launched or remade itself in the last thirty years has done so by focusing on value. The original LS was a S-Class for a third less. Today the Genesis is a LS with the same discount. There was Audi after their unintended acceleration fiasco, BMW promoting zero cost maintenance, and Maserati selling Ferrari engineering at a six-figure discount. Even Bentley, who pulled themselves out of irrelevancy ten years ago with a great new car that cost 25% less than the old Arnage or a RR but was better in every way. I’ll say it one more time: If GM wants to succeed, they need to give their engineers a mandate to make better cars that can be sold profitably for less than their competitors. Get over these ridiculous, adolescent fantasies about a Bugatti-beating Cadillac.

    What's the motivation for the rush to get an IPO this year? Call me crazy, but I'd suggest looking at who stands to make money off it. Fourteen GM execs have received 120K shares of future GM stock worth between $7 and $12 million, and they are the people in GM who have the most influence over when the IPO happens. Think that maybe after a couple years of living under the austerity of only a mid six-figure salary and no bonuses that they might want their IPO money and a return to unsupervised contracts sooner than later?

  • Report this Comment On July 14, 2010, at 12:20 PM, TMFMarlowe wrote:

    I actually think that what Ed Whitacre wants is a car he can recommend to his well-to-do buddies, and so yes, I do (emphatically) believe that the Cadillac being discussed is an American S-Class (for a third less, at least at first), not an American Maybach. Nobody seriously think the XTS is that car -- the XTS is a barge for Cadillac's legacy customers, nothing more or less. I'm sure that somewhere in suburban Detroit somebody has already prototyped a dealer-installed landau roof kit for it.

    You've heard the story about the CTS-V that ran out of gas while one of Ed's friends was on a test drive? Ponder.

    And I don't buy the idea that this is about execs wanting to cash in. The people making the decisions on this aren't those people.

    John

  • Report this Comment On July 14, 2010, at 2:37 PM, baldheadeddork wrote:

    I have a hard time seeing a car running out of gas during a test drive as a reflection on the quality of the product. The responsibility for that falls on the dealer, salesman and customer driving the car, in that order.

    An S-Class at a 33% discount would be a $60K car. So how does this get to the black helicopter conspiracy about the government killing projects that cost too much or were insufficiently green? You can get damn close to $60K on a Silverado that generates more pollution than any car product in GM's wildest dreams. Half of the Corvette models start at over $60K. Every Escalade model starts at over $60K.

    If they want to re-invent the Lexus LS, the excuse that the government will kill it because it will cost too much is totally contradicted by GM's existing lineup and the actions of the government since the bailout. (If environmentalism was that much of a priority, why does Chevy still spend millions on NASCAR and road racing?) Give me your best Sarah Palin impersonation if you want, but I haven't seen a shred of evidence to support this claim before I read your piece - or after.

    I think American auto journalism and the old school in Detroit have fed each other self-serving and comically outdated stereotypes for decades. The prevailing attitude among car writers is that Joan Claybrook is still running NHSTA, Ralph Nader is writing the rules at DOT, and these are the biggest threat than anything in Detroit. In this piece you accept as fact that the government would kill product development on a really good luxury sedan. Why? Because everyone in Washington is so stupid about the car business that they couldn't possibly know how effing profitable this would be if you get it right? Do you think no one in the Obama administration owns a Lexus or knows how to read a spreadsheet?

    The biggest obstacle to GM building a S-class competitor isn't the government. It's the engineers, designers and managers at GM who needed two tries to get the interior of the CTS above the standards of a rental car. The people who replaced two mediocre luxury models with what most people expect to be another one - the XTS. The people who depend on rap videos to keep selling the Escalade instead of competing with BMW and Land Rover. The division managers and higher from the Wagoner era are gone, but the engineers and designers who created those cars are going to make GM's new cars, too.

    Now GM wants a quick IPO so they can turn these people loose on a S-Class competitor? I would hope Whitacre has the brains and the brass to tell them to prove they can come up with a midsize as well done as the $20K Sonata before they take a crack at the best luxury sedans in the world.

    And if Whitacre is really motivated by what his friends in the Hamptons think - God help General Motors. If he doesn't like any Cadillacs tell him to drive a Lexus, Mercedes, or whatever the hell he wants. Alan Mulally drove a Lexus while Ford built their mainstream lineup into one of the industry's best. The last I heard, he was still driving it. That may change in a few years, but resurrecting Lincoln didn't start until all of the Ford models were brought up to speed and the public image of the Ford brand was restored.

    If GM goes about its recovery any other way, they are doomed.

  • Report this Comment On July 14, 2010, at 4:07 PM, Detfan wrote:

    What a refreshing site, where the author actually interacts with its readers comments.

    I have no idea when GM should do an IPO, but I think it should be AFTER the midterm elections to get the politics out of it. The more profitable quarterly returns, the better for the IPO, however, there is obviously controversy in whether the economy will pick up steam sooner vs later.

    I have been impressed with GM, really since Bob Lutz came over and offered his influence. I've seen and purchased from GM, vehicles that are built to be industry leaders, not middle of the road quality. You need only to look at how well recent launches are doing compared to the previous models. From the Malibu, to the Equinox, to the SRX, to the Buick LaCrosse, it is no wonder that GM has been able to keep a plus 20 market share with 4 labels instead of 8.

    I read about a survey, about three years ago, where 4 out of 5 import dealers admitted that GM's future product line looks like the best in the industry. That certainly seems to be the case, and looks to continue with the Chevy Cruze, which is larger, has more features, has more safety, and higher mileage than the main competitors in its segment. The Malibu did the same thing in 2008, and is still building market share in its third year of its current style.

    So, all that said, I believe that GM is well on its way to becoming a private entity, whenever the IPO is, and is postured in emerging markets to capitalize on growing markets.

  • Report this Comment On July 14, 2010, at 4:17 PM, Deepfryer wrote:

    "People have been shouting about this red herring since the bailout and it just hasn’t happened. Big, bad government hasn't told GM to kill the ZR1 or the Escalade, and it hasn't shut down development of the C7 Vette, so what on earth other than your preconceptions leads you to believe so strongly that a new large luxury car platform would be stopped by the bureaucrats?"

    I guess you forgot about the Hummer brand... not to mention Pontiac and Saturn.

  • Report this Comment On July 15, 2010, at 8:31 AM, Detfan wrote:

    Actually, it was prudent business to downsize from 8 divisions to 4. GM doesn't command a 50% market share anymore, with over 20 other domestic and international competitors selling in America. The number of nameplates that had to be marketed was a drain. With four divisions, we are already seeing more targeting advertising, and sales are increasing with the existing four brands.

    You indicated that the slash from 8 to 4 was government generated. In reality the market share for GM, coupled with SAAR under 10M, and GM finances going 2B deeper each month, forced the decision.

    Ford is eliminating Mercury, for basically the same reasons. Did the government call them to force them to do that, too?

  • Report this Comment On July 16, 2010, at 12:50 AM, baldheadeddork wrote:

    @Deepfryer

    GM announced it was putting Hummer up for sale in June 2008, and when they couldn't find a buyer they shut down the H2 line in January 2009. Both occurred months before GM filed bankruptcy and the government's bailout debt turned into an ownership stake. Hummer was dead from the moment gas went over $3.50 a gallon and sales fell off a cliff.

    Pontiac and Saturn? The entire conspiracy theory is that the government would/will force GM to kill off expensive and inefficient products. Pontiac and Saturn made a lot of the least expensive cars in GM's lineup and they got better gas mileage than the corporate average.

    But other than all the facts, you might be on to something...

    Hummer failed because GM confused a brand with the 00's equivalent of a Member's Only jacket and parachute pants.

    Pontiac had, for decades, been nothing more than Chevrolets that had been restyled by dragging them through the accessory aisle at Pep Boys. I don't pretend to be an expert on running a car company, but I do think it's commonly accepted that you shouldn't have divisions in your company fighting one another for the same customers.

    Saturn hurts. They had amazing customer loyalty and buyers loved the way dealers did business. But they never got the volume they needed to pay for unique models. For the last decade of its existence Saturn bounced between rebadging other GM products with the same bad outcome as Chevy/Pontiac, or selling rebadged Opels that were good cars but impossibly overpriced because of the strong euro.

    Pull.

  • Report this Comment On July 16, 2010, at 1:25 AM, WallstreetKnight wrote:

    baldheadeddork,

    I have no idea who you are, but you seem to have an amazingly deep understanding regarding the automotive industry.

    This is the most interesting string of replies I've read on Motley Fools - barring none.

  • Report this Comment On July 16, 2010, at 6:24 AM, baldheadeddork wrote:

    Muchos gracias. :D

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