By Chris Haak
Less than a year and a half after its predecessor, General Motors Corporation, collapsed under the crushing weight of declining sales and market share, unsustainable debt levels, and enormous labor costs, General Motors Company has completed its initial public offering. Starting this morning, you can hit up your broker for a few shares of GM (the company got its old ticker symbol back) and ride what may or may not be the company’s ascent toward business success.
The company sold 478 million shares yesterday, priced at $33 per share. That price was well above the original expected price range of up to $27 per share, and also at the top end of the revised $30-33 per share. The revised range, and the higher price, reflect considerable IPO demand for GM’s stock. On top of the 478 million shares, GM’s bankers were expected to also sell another 71.7 million shares as an “overallotment,” which is allowed when demand for shares is stronger than expected. The 478 million shares raised $15.774 billion, and the 71.7 million shares raised another $2.366 billion, for a total common stock sale of $18.14 billion.
That lofty figure has very little company in the history of finance; it marks the second-highest IPO value in US history, behind only Visa’s IPO in 2008 that raised $19.7 billion. GM also sold $4.35 billion in preferred shares, the proceeds of which it intends to keep to fund operations. Adding the common and preferred shares together, and the total comes to $23.1 billion, which marks the largest stock sale in US history, topping Citigroup’s $21.1 billion stock sale in December 2009, which that company also used to pay its way out of TARP.
The stock sale allows the US government to reduce its stake in General Motors from 61 percent to about 37 percent. The US Treasury will still be GM’s largest stockholder, and the “Government Motors” moniker is likely to stick around at least until the Treasury holds zero GM stock, but cutting that stake by nearly half certainly helps. For the next six months, the US government has agreed to not sell any more shares. Over the next few years, the government will gradually reduce its stake until it owns none of GM’s stock.
For the government to break even on its bailout of GM, GM’s share price will have to rise considerably over its IPO price. On Wednesday morning, before the IPO, the Treasury owned 912 million shares, for which it had paid about $40 billion. It sold 358.5 million shares at $33 per share, for a cash-out value of $11.83 billion. At the IPO price, GM’s remaining 553.5 million common shares are worth $18.266 billion, meaning that if the stock price stays flat, taxpayers are on the hook for a $10 billion loss.
If the taxpayers are going to break even, the US Treasury will have to get an average price of about $54.37 per share when it sells the remaining 553.5 million shares, which is a 65 percent share appreciation. We’ll have to see how GM’s stock performs in the coming months to determine whether that is realistic or not. The first trading day’s performance will also determine whether the IPO was priced appropriately. Generally, investors expect to see a 10-20 percent price appreciation from the first trading day. If the price spikes more than that, it would mean that GM left money on the table and didn’t get as high of a price as it could have for the taxpayers. If the price drops, it might mean that investors are calling GM’s business into question.
Regardless, we’ll know the outcome of the first day’s trades within a few hours. The success of the bailout – at least from a taxpayers-breaking-even standpoint – will not be clear for months, if not years, in spite of what the Center for Automotive Research (CAR, an industry-funded think-tank) might have to say about potential job losses saved by the bailout.