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Home > Blogs > Anthony Harrington > GM is the second largest IPO in US history – why?

GM is the second largest IPO in US history – why?

Finance Blogger: Anthony Harrington Anthony Harrington

From needing a massive US taxpayer handout at the height of the crash, on November 17 2010 General Motors successfully rose from the ashes, pushing through a $15.8 billion IPO of common shares, the second largest in US history after the $19.7 billion Visa IPO in 2008.

Moreover the GM IPO is on course to raise an additional $8.1 billion, if the company’s overallotment option, plus a sale of preferred shares goes through. If this happens GM will have officially scooped the largest IPO of common stock ever, beating the previous high of $22.1 billion set with the floatation of Beijing’s Agricultural Bank of China.

The big question, given the company’s well-publicized woes during the 2008 downturn, plus the relatively unhappy state of the US auto industry which struggles to be price competitive in global terms, is why GM has found it so easy to raise so much money.

Interestingly, although the IPO was priced at $33, according to Bloomberg, the US Treasury, which was GM’s biggest shareholder and is now a minority shareholder, needs to get $43.67 as an average price for its stake in order for the US taxpayer to break even on its bailout of GM.

Moreover, $33 is a very good price indeed for GM to have achieved and represents a huge vote of confidence by investors which it is hard, at this stage, to feel entirely comfortable about. Bloomberg quotes one US auto consulting firm as saying that investors are going to have to be really patient in order to get their money back, and that GM was “really going to have to hit the ball out of the park in the next couple of years.”

The Treasury took a modest loss to get the IPO away, losing $3.8 billion on the sale of 358 million shares. It retains a 37% stake and according to the Detroit News, will need to see the remaining shares pick up to over $50 to break even on its original $49.5 billion bailout of GM.

Commenting on the IPO, Treasury Secretary Tim Geithner said:

"[It] is an important step in the turnaround of the company and for our work to recover taxpayer dollars and exit this investment as soon as practicable [...] It is now widely recognized that the taxpayers' investment not only helped save jobs during the worst economic crisis in a generation but also gave the auto industry a solid foundation on which to build."

There was reportedly some nervousness in Treasury circles that the Government might end up looking foolish for agreeing to too low a price if the market bid up GM’s shares in the first few days after the IPO. However, that does not appear to have happened. Although the shares shot to $36, up $3 within hours of trading commencing, the stock was trading at just over $34 dollars by the weekend following the IPO. On a huge, high profile IPO like this there will always be some instant profit taking by institutions who scored large allocations, and retail investors will bid up the price seeking to get in on the action. The Treasury will be relieved that the IPO was not staged at the $29.00 mark, as originally proposed.

For many, of course, the price was less important than the fact that the shares of an iconic US company are once again being traded on the NYSE.

As part of its restructuring through the bankruptcy process, GM shed 92% of its debt and closed 14 out of a total of 47 plants. It has turned its loss making business around, going from a reported loss of $4,000 per car made, to a profit of $2,000. That turnaround has been crucial to making the company more attractive. Chris Liddell, GM vice chairman and CFO summed it up nicely when he said: “We used to be a $100 billion finance company and a $100 billion pension plan with a small car company attached.” That is the model that GM is now distancing itself from as it seeks to get back to its primary day job, making cars for profit. If it succeeds investors will get some return on their enthusiastic support for the GM IPO. If it doesn’t, this IPO could sting…

Further reading on IPOs and bailouts:

Tags: auto sector , General Motors , GM IPO , IPO , manufacturing , US Treasury
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