Yep, "Government Motors" is going public.
As you've probably heard by now, General Motors filed its IPO registration statement -- in SEC-speak, a "S-1" -- late on Wednesday afternoon. As a service to you, dear Foolish reader, I've read through that registration statement -- a whopping 734 pages, counting attachments -- and while there's not a whole lot in it that will surprise anyone who's been watching GM closely, there are a few things worth calling out for those who are thinking about buying the stock.
The business plan: Sell lots of cars and trucks
The S-1 lays out management's planned approach to the business, potential risks, and a great deal of financial information. Most of the business plan section is what you'd expect. GM's managers plan to keep working on cost reductions. They plan to (and feel they need to) keep new vehicle introductions at a high tempo, to keep products competitive. They want to keep the companywide breakeven level as low as they can, in case the current industry reality of more subdued annual vehicle sales becomes a long-term thing. They want to add to their success in Brazil and China while expanding into new markets. They plan to get their troublesome European operations under control. Nothing too surprising, in other words.
Guess what: There's risk involved
Likewise, the list of risk factors contains a lot of boilerplate, but even the non-boilerplated stuff doesn't hold many surprises: The industry as a whole has more capacity than it needs, and overproduction by competitors could impact GM's ability to get good prices for its products. Rising commodities prices could shrink GM's margins. If suppliers go under, that could disrupt production. Some of management's plans -- reducing the number of brands, for instance -- might not work out as expected. GM's dealers will have problems if Ally and GM's other financing sources stop coughing up the loans.
There's more, of course. The Feds and the UAW will continue to own part of GM and may not vote their shares the way management would like. The company will need to spend big on technology to keep up with tech-heavy competitors like Ford (NYSE: F) and Toyota (NYSE: TM), and if they can't spend, they might not keep up. GM doesn't have total control over its joint ventures in China, which could cause problems. Et cetera.
Again, none of it is shocking, but there are a couple of points worth calling out:
- Pension obligations. GM's pension plans are underfunded by a whopping $27 billion, thanks to "significant declines in financial markets and a deterioration in the value" of assorted assets held by the plans. Pension laws are complicated, but the takeaway here is that GM may be required to make some big contributions to the plans starting in 2014. This might or might not end up being a problem, but it's something for GM's future shareholders to watch closely.
- Financial controls. Buried in the risks section is this stunner: "We have determined that our disclosure controls and procedures and our internal control over financial reporting are currently not effective." CFO Chris Liddell has hinted at this in the past -- my sense is that he wasn't happy with GM's financial reporting systems when he arrived at the company earlier this year. He's put a new system in place that seems to be working, but he isn't willing to swear that it's working until he's got some year-over-year results to compare. Again, this is something for future GM shareholders to keep an eye on.
In other words, GM is a huge, damaged business with some impressive strengths and nontrivial risks, and while they might be rushing their IPO, the turnaround is under way and management thinks it stands a good chance of success.
And now, it's time to see if the market agrees.
What they're selling and who's selling it
The offering is straightforward. GM itself isn't issuing any new common stock, presumably to avoid diluting the government's remaining holdings, and thus won't be receiving any of those proceeds. Rather, the IPO will offer a pool of existing common stock (drawn from shares currently belonging to the Feds, and possibly others) as well as a new series of preferred shares, called "Series B", which will convert to GM common stock in 2013. That lets GM punt the issue of dilution for a few years.
The underwriters include nearly every big bank on Wall Street, led by JPMorgan (NYSE: JPM) and Morgan Stanley (NYSE: MS), and -- thanks to Goldman Sachs (NYSE: GS) -- they'll be paid a fraction of their usual fees. According to a Bloomberg report earlier this week, in talks with the Treasury Department earlier this year, Goldman offered to accept a fee of 0.75%, well below the usual 3% that is customary on these kinds of deals and significantly below the 2% rate that had been offered by Bank of America (NYSE: BAC) and others. This move apparently caused some consternation among the banks, who were ultimately compelled to limit themselves to that 0.75%, but it's a (relatively speaking) good deal for taxpayers.
So should I plan to buy this thing or what?
I don't know yet. GM is a huge, increasingly compelling turnaround story, and the appeal -- especially for those who have watched Ford's stock price soar through its turnaround -- is obvious. On the other hand, it's still General Motors, with a decades-long record of bumbling, and while the current managers are talking a great game, it's still early in their tenure. On the other other hand, that record of bumbling might lead many investors to pass GM by, potentially creating a better opportunity.
I admit that I was nearly sold on GM's management before last week's CEO shuffle. Now? I want to get a better read on incoming CEO Dan Akerson before deciding how enthusiastic I am about GM's prospects. It's also worth keeping in mind that, while GM's senior management is new, its lower ranks are mostly veterans of GM's old culture. Only time will tell how thoroughly those folks are committed to GM's new way of doing things. And, of course, whether the stock is worth buying will depend on -- as always -- the price, and we don't know that yet.
But I will say this: If you're thinking about investing in GM, get a copy of the S-1 for yourself. It's available for free on the SEC's website, here. You don't need to read the whole thing unless you're really interested in nuances like historical asbestos litigation and foreign currency hedging and the like. But do read the first 35 or so pages carefully, and then at least skim the next three sections, to about page 190 or so. It might be some time before GM lays out so many details of its business so clearly again.
