GM IPO: Buyer Beware
General Motors is expected to begin soliciting for its IPO within the next few weeks. Some warning signs are surfacing regarding the risks relating to investing in New GM. These risks will be easily recognized by astute money managers and may require GM (and its owners, the US Treasury) to rely more upon the Mom and Pop investors who are less sophisticated and more susceptible to being taken advantage of.
Prior to filing for bankruptcy, General Motors funded its operations by borrowing from small investors. This funding came in the form of "baby bonds" that were traded on security exchanges and made readily available to retail buyers. Around the same time that unethical practices led to predatory lending in the mortgage industry, GM engaged in its own practice of predatory borrowing. The individuals who lent money in good faith eventually had their rights subordinated to the politically powerful labor unions.
It will come as no surprise if GM once again tries to tap into the multitude of retail investors that they have been able to capitalize on in the past. These same investors can utilize the SEC S-1 IPO filed by GM as a type of "CarFax" to uncover some huge red flags and help them avoid investing in a potential lemon.
Major risks involved with investing in New GM are spelled out on the S-1 filing. Some of the more blatant risks include admittance by General Motors that they "have determined that our disclosure controls and procedures are currently not effective". Essentially, the numbers can not be trusted. On top of this, a disconcerting note at the end of the risks section of the filing states that GM is exempt from federal anti-fraud laws since the offering shareholders are the US Treasury. So investors in the IPO have limited recourse if they are deceived by inaccurate financial reporting.
An often overlooked detriment to GM is their lack of captive financing. Ford's recent impressive earnings report benefited from Ford's credit division which contributed about a third of earnings. GM relies upon Ally Financial which is currently majority owned by the US Treasury. This reliance is a handicap for GM as it tries to compete in a crowded field. The risks are large enough to also be listed on the S-1.
UAW costs remain as another threat to General Motors' ability to succeed. The S-1 discloses underfunded pension obligations of over 27 billion dollars. UAW leadership has already made mention of the fact that they expect to benefit from any future profitability at GM. UAW liabilities were one of the main contributors to the first GM bankruptcy and continue to impede the chances of a successful turnaround.
More telling signs that GM remains a risky investment choice can be found outside the S-1 filing. Observing General Motors' actions since bankruptcy can give us a picture of where this company is heading. While the restructuring has temporarily enhanced the balance sheet by removing debt, few other clear signs of improvements have been displayed. An unproven management team lead by four different CEOs over the past two years does not instill great confidence (also listed as an S-1 risk factor). Recent marketing campaigns revolve around the Chevy Volt. Expensive World Series ad time has been purchased to promote a niche vehicle that is clearly not going to be the driving force behind a profitable GM. Other ads try to appeal to car shoppers' patriotism with slogans like "the strength of our nation can be found in every car we make". This harkens back to the old days of "baseball, hotdogs, apple pie and Chevrolet", and that didn't end very well. Newest GM CEO, Dan Ackerson, says he wants to use humor to sell cars. Taxpayers and bondholders have not been laughing up to this point.
One gets the sense that we are dealing with a new General Motors that still just does not get it. The key to success will be to build quality vehicles that appeal to the masses, not running a political public opinion campaign. While Ford and Hyundai are building world-class mainstream vehicles such as the Fusion and new Sonata, respectively, Chevy is still pedaling mediocrity with vehicles such as the unexciting Impala. Until such time that it becomes clear that GM has a vision for the future (other than the Volt and patriotism) with reliable accounting to substantiate the company's value, it would be wise to delay an IPO. Investors should not be expected to take on the risks of a corporation that will not attest to its own financial reporting. If the IPO proceeds as planned, potential investors should heed two words: Caveat emptor.
Mark Modica is an NLPC Associate Fellow and a spokesman for GM Main Street Bondholders.
GM's Stagemanaged IPO (Investor's Business Daily)