Professor George Cook of the Simon Graduate School of Business discusses the recent events at General Motors (GM); the change in leadership and the announcement of the IPO, which he thinks is politically motivated. GM has had a rough time recently where it lost its leadership position to Toyota in the U.S. auto market and had $88 billion wiped out. The firm filed for bankruptcy on June 1, 2009, received a $50 billion government bailout and new management was instated. As a part of the restructuring, GM also had to streamline its operations and eliminate brands like Saturn, Hummer and Pontiac from its portfolio and having gone through four CEOs in less than four years was a very tough challenge.
In a surprising turn of events, Edward Whitacre, the Fed-appointed CEO, announced his retirement on September 1, 2010 when it was widely thought that he would maintain control until 2011. He also announced the IPO before Daniel Akerson, the new CEO would take charge. Professor Cook suggests that this IPO was announced prematurely and since timing is everything with such announcements, it took everyone including the investment industry by surprise. There are 500 million shares outstanding and the Federal Treasury wants to bring its share down from 61% to 50%. There are also political points to be scored if the announcement turns out to be successful with the fall mid-term elections in November. It would be the largest stock offering in U.S. history, expected to garner about $16 billion.
However, there are a few points in favor of the IPO:
1. The auto industry is improving though hasn’t reached its previous levels in terms of sales.
2. GM has had two profitable quarters with a mid-year profit of $2.2 billion and has repaid $6 billion of the federal money.
3. The current capacity utilization at its plants is very high at about 93%, margins on the sales are improving and they have a new management.
The question whether the timing of the IPO launch is correct is still unclear in the investors’ minds but one thing is certain according to Professor Cook–that with the mid-term elections coming up soon, the administration is pushing the IPO to gain political points.
Video Link here: Professor Cook discusses the timing of the GM IPO