A few days, I clambered out on a limb and explained how you can get rich by investing in the General Motors IPO. I argued that the U.S. Government, the controlling shareholder in "Government Motors," was lowballing the IPO price. That the whole IPO "game" was rigged by an IRS promise to let GM off the hook for taxes it should owe on future profits, and the effect of this would be to make GM appear more profitable than it really is, thus more of a bargain to potential buyers.
Result: GM shares will skyrocket post-IPO.
And yet, quite a few Fool readers responded that they wanted no part of a public GM:
- "You have git to be kidding!" exclaimed twinstocks.
- "GM stinks- don't touch it with a fifty foot pole," advised 4rustin.
- "As soon as Obama stops directing government agencies to over-spend on GM junk, GM will fall back into despair," wrote liveoilfree.
- In short, while some readers acknowledged that "really could have the potential" (truthisntstupid), and others expressed a desire to rush out and "get some IPO shares from my broker" (INoFoolin), there's still a lot of skepticism as to what will happen to GM after the short-term post-IPO "pop."
Frequent discussion board contributor yosemitebean summed it up best: "I have no doubt that GM will come out strong. It's the staying power that I question." Well, guess what, Yosemite? As it turns out, the U.S. Government may be right there with you.
Slow cars, fast money
Actions speak louder than words, and whatever our government says about this IPO, it acts like it has little faith that a post-IPO GM can compete with the likes of Ford (NYSE: F ) , Toyota (NYSE: TM ) , and Honda (NYSE: HMC ) .
Crunching the numbers recently, Bloomberg concluded that to raise enough money to repay U.S. taxpayers for money loaned to GM, Treasury must cash out its 61% ownership interest in GM at an average sales price of $43.67 per share.
Now logically, if the IPO proceeded as planned at a top price of $29 per share, any shares Treasury did not sell at IPO would need to rise above $43.67 before they were sold, in order for taxpayers to break even on our "investment." (Sell a few shares below the average price, and you need to sell a few more above to compensate.) Thus, to be a success, we needed GM shares to rise by over 50% post-IPO before selling off the remaining portion.
Now it seems that was our best-case scenario -- and now almost certain to fail.
GM: Government Math
However, on Tuesday, Treasury trumpeted a plan to raise its asking price, offering shares at not $29, but perhaps as high as $33. "Good news," you say? $33 is more than $29, so this brings us closer to the magic number? Well, it might have, except for one thing -- the Feds are also increasing the size of the IPO. Initially intending to sell 303 million shares, the Feds will now unload perhaps 412 million.
Hip! Hip! Uh ... Boo!
Now here's the problem in a nutshell: 412 million shares is nearly half the government's stake in GM. If half the shares sell for $10 below $43.67, then logically, the government must sell the rest of its shares for $10 above $43.67 to break even. Very roughly, the government needs GM shares to rise to $54 or thereabouts post-IPO, in order to sell the rest of its shares and still end up at its hoped-for average sales price of $43.67.
I mean, sure, the government wants to maximize the cash the IPO generates. It also wants to defang critics alleging the IPO is designed to enrich underwriters like JPMorgan Chase (NYSE: JPM ) , Morgan Stanley (NYSE: MS ) , Citigroup (NYSE: C ) , and Goldman Sachs (NYSE: GS ) . Setting a higher asking price for the IPO neatly accomplishes both goals. But why dispose of so many shares on IPO day? Why not sell just a few shares at $33, keep the rest of your powder dry, and wait for the share price to rise? There's plenty of time to sell the rest of the shares later on, right?
Discounting the possibility that the government is just plain incompetent, the logical reason to dump as many shares as possible, as quickly as possible, is if you do not believe the shares are undervalued. If you think GM is a lousy company (as so many Fool readers have argued), you'd want to get quit of it as quickly as possible, before the public catches on and torpedoes the stock price.
For me, that appears to be the likeliest explanation. So while we will be lowering GM's ultimate obligation to the taxpayers thanks to this larger IPO, I can't help but wonder if total remuneration is a pipedream.