This deal has more subplots than War and Peace.
General Motors, an icon of American industry and for many decades the biggest car maker in the world, is selling itself to the public Wednesday night through an initial public offering of its stock.
The deal comes 16 months after GM emerged from bankruptcy, the fourth-largest Chapter 11 filing in U.S. history. Since then, the U.S. government has been the largest stakeholder, and a reluctant one at that.
Demand for the shares ahead of the offering appears to be strong, a good sign for the company, and taxpayers. On Tuesday, GM announced it was raising the price range to $32 to $33 a share, up from the original price of $26 to $29. Then on Wednesday, the company said it was raising the number of shares it will offer by a stunning 31%, to 478 million form the originally planned 365 million.
Several hours before the pricing, the Wall Street Journal reported that the shares would sell at $33 a piece, the high end of the range. If that proves true, earlier reports of strong demand would appear to be confirmed.
GM also increased the offering of its preferred shares to as much as $4.6 billion, up from its previous offering of $3 billion.
Analysts said investors are impressed with how the company has cut costs and restructured -- essentially scaling itself down to a manageable size -- since passing through bankruptcy in June 2009.
The deal is historic in many ways and its ramifications extend far beyond Wall Street.
Including preferred shares and the exercise of the over-allotment, GM could sell 550 million shares. If the common and preferred shares were to price at the top of their expected range, the IPO will be the largest in history, topping Agricultural Bank of China's $22.1 billion IPO earlier this year.
Some of that cash will be used to pay back the $49.5 billion in bailout funds GM received from the government to help keep it afloat during the worst economic downturn since the Great Depression. The U.S. Treasury, which holds the government’s 61% stake in the car maker, is expecting to take a loss. According to Bloomberg News, the government will break even only if the stock rises 50%.
Still, it sends an important message for GM shares to begin trading again on the New York Stock Exchange so soon after bankruptcy. For GM the stakes are high.
“A successful IPO will help re-establish GM’s credibility as a viable private concern,” said Dante Roscini, a senior lecturer of business administration at Harvard Business School.
“For consumers, who need to know that the company will be around long after they have bought its products, the new listing will show GM’s renewed ability to access the capital markets. For the federal government, the reduction in its ownership below 50% will underscore its ability to execute without delay an exit strategy from the initial investment,” Roscini said in comments released by the school.
After years of mismanagement and tens of billions of dollars in losses, GM is trying to pick itself off the ground and justify the Obama administration’s decision to rescue it and fellow Big Three U.S. automaker Chrysler at a total cost of $82 billion in taxpayer funds. Ford (NYSE:F), the other Big Three U.S. carmaker, refused a bailout and has seen its profits surge in recent quarters.
Since the bailout, GM has changed its leadership and streamlined its operations, apparently no longer obsessed with being the biggest.
“That business model has been thrown under the bus by current management,” said Linda Killian, portfolio manager for the IPO Plus Fund, which is advised by Renaissance Capital in Greenwich, Conn.
Meanwhile, the Obama administration has almost as much at stake as the company. Rescuing GM “was a controversial decision then and it still is,” said Killian.
The IPO arrives just two weeks after mid-term elections in which voters leaned decisively in favor of candidates who have been critical of bailouts and what they described as excessive government interventions into the marketplace.
A successful IPO would help vindicate the administration’s decision to offer a life preserver to GM when many were calling for the company to be allowed to either sink or swim on its own.
The Obama administration argued at the time that if GM (and Chrysler) toppled, the blow would reverberate catastrophically throughout an already fragile U.S. economy. Tens of thousands of jobs would be lost, not only at the car makers themselves, but also at the many suppliers and dealers of products used by the automakers.
Besides, no one wanted to see an American icon like GM disappear.
The administration wasn’t timid in its handling of GM once it became clear that the company wouldn’t survive without a bailout. The government essentially forced out CEO Rick Wagoner, who had come under sharp criticism for being out of touch with GM’s precarious situation.
Then it persuaded GM to shut down 1,100 dealerships in an effort to scale back its bloated operations. Finally, the government orchestrated the shockingly swift bankruptcy proceeding, which lasted a little over a month, a blink of an eye compared with most Chapter 11 filings of that magnitude.
All of these moves led critics of the bailout to suggest the administration was overstepping its authority.
Now the IPO represents not only a new lease on life for GM, but also something of a liberation.
“From the company’s perspective, it wants to be a non-government entity, free to fulfill its own strategy,” said Killian. “And from the standpoint of the taxpayers, we don’t want to own an automobile company.”
GM has slimmed down its brands, shedding unprofitable names like Hummer and Saturn and focusing on successful names such as Chevrolet and Cadillac. It has also significantly reduced its debt, and lowered its break-even number, or the number of cars the company has to manufacture and sell to cover the cost of making them.
“Judging from feedback, investors are taking a very hard look at the company and they like what the company has accomplished since the bankruptcy,” said Killian.
An important question for investors has been whether GM’s shares would price in a range that satisfied both the company and the government, two interested parties whose goals aren’t necessarily the same.
The Treasury Department has a political goal of getting paid back, a desire that could have influenced a move toward a higher price range. Meanwhile, GM wants a successful IPO, which calls for a more moderate approach.
That question seems to have been answered, however, by the strong demand for the shares. The stock begins trading Thursday under the symbol ‘GM’.