By on November 16, 2009

Time to head.. out... uh... somewhere! (courtesy:squidoo.com)

GM’s first post-bankruptcy financial data has arrived, underscoring in red ink the folly of the government “investment” in the shambling zombie once known as General Motors. Bankruptcy-driven improvements in cost structure have not prevented GM from turning a non-GAAP-certified loss since emerging from Chapter 11, and GM is already warning that 4th quarter results will be even less attractive. More importantly, beneath all of the interpretation of this latest batch of weak results, rests the biggest lie of all: GM will be paying back the taxpayers. GM has simply defined the terms of its debt as $6.7b, or about half the amount remaining in its $16b bankruptcy-present escrow account. The plan is to have the taxpayers pay off GM’s debt to the taxpayers, and collect the remaining $6b or so for operating cash.  When called on the ruse, GM CEO Fritz Henderson has only one defense: Taxpayers will receive their just reward only when GM’s IPO relieves them of their 60 percent equity stake. But even with the goalposts moving up in hopes of a PR win, there’s little evidence that GM will come close to paying off their full bailout bill.

The timing of GM’s planned IPO is perhaps the major question in this equation. Henderson said over week ago that an IPO could be contemplated for the second half of 2010. Shortly after he made that statement, GM’s Chairman Ed Whitacre contradicted him, saying it was too early to even contemplate a GM IPO. The Government Accountability Office revealed that no plan for GM’s IPO has been formulated on the government end, citing a few of the difficulties facing a public offering. Stranger still, the GAO report indicated that the decision was neither Whitacre’s or Henderson’s, but that the call would be made by the Treasury Department. Of course, it also noted that the Treasury appears to be woefully understaffed and unready to prepare an IPO strategy for GM.

Since GM exited bankruptcy, persistent rumors have placed a possible IPO at around Henderson’s indicated target of Q2-Q3 2010. The GAO report backs up these assumptions, as its only hard date on GM’s path to private ownership is the expiration of its escrow account in July of next year. When that happens, GM will have declared its independence from obligations to taxpayers, and will receive the remainder of its escrow account, which could be as much as $7b at that point. A reinforced cash position, some good PR and a decent lineup of new models will have GM looking as IPO-worthy as it’s been in a while, and with both GM and the government anxious to disentangle themselves, IPO plans for that time frame seem more than justifiable.

Or, as Henderson put it today in an apparent rejection of Whitacre’s cautious approach, “there are a lot of factors suggesting [an IPO] should be ready to go in the second half [of 2010].” A mid-2010 IPO is looking especially attractive considering GM needs to fund its VEBA pension funds to the tune of $13b by 2013. CFO Ray Young has said that the automaker is looking into the possibility of beginning payments to the pension funds this year, but with payments on GM’s government loan going forward, there will only be enough cash to pay down just enough pension liability to make an IPO look more attractive. If that.

And the longer GM waits on an IPO, the greater the likelihood of a meltdown at Daewoo or Opel, both of which are being kept in the fold with taxpayer money and all the charm GM’s executives can muster. The specter of a sustained slide in US market share is another reason an IPO won’t wait past 2010. GM can only walk its current tightrope for so long before one of a number of IPO-blowing scenarios is going to erupt.

But for every motivation for GM to launch an IPO sometime next year, there are other pressures to wait. Though GM’s post-bankruptcy results show a cleaned-up balance sheet, EBIT is still negative, and North American Operations are still bleeding cash. And, as Henderson has admitted, the fourth quarter results for 2009 are only going to bring worse news. Paying the government back a billion bucks, plus the nearly $3b Delphi rescue have basically guaranteed that GM will burn cash through year’s end. And that’s before we have any idea of how the return of Red Toe Tag sales will affect incentive levels and earnings.

Nor is 2010 expected to be an ideal year for an automaker IPO. US SAAR is being widely projected to hold flat or climb slightly, with plausible estimates ranging from 10m to 10.7m. Even if GM does hold onto market share through 2010, those market levels will test GM’s 10.5m SAAR break-even pledge. If market share falls, GM will be losing money right into the summer. If that happens, GM could even hold off on final repayment of the $6.7b of outstanding government loans, adding to its pre-IPO debt levels. Incidentally, current debt levels are at $17b, not counting the $13b in VEBA obligations or the value of the Treasury’s 60 percent stake.

If there’s a final piece of this puzzle though, it’s the Volt: GM’s hail-mary will provide a speculative upside to GM’s value as long as it’s still just around the corner. An IPO in the midst of the Volt’s inevitably messy launch won’t attract anyone; an IPO just before the Volt launch will bring long-shot investors and problem gamblers out of the woodwork.With the rollout to selected customers beginning in Q4 2010, GM’s single product-related argument for an IPO seems to demand a 2010 offering.

Despite the apparent ongoing debate between Whitacre and Henderson, a mid-2010 IPO looks increasingly likely. GM will only be a year out of bankruptcy, and thusly blessed with ample excuses. A much-hyped new product will be right around the corner, tantalizing investors. Opel and Daewoo can likely be held in check until then. The last bump of federal cash will become unrestricted. Best of all, GM will have been trumpeting its alleged pay-back of government loans (conveniently leaving out the fact that taxpayers are merely repaying themselves) for months, giving it a fresh head of (misleading) PR steam.  The only thing missing from the equation: the $66b-and -change market valuation that GM would need to actually pay back taxpayers.

But for all the pressure being exerted on GM right now, the element most lacking is pressure to fully repay the entire $50b-and-change that GM received from the taxpayers. GM has to prove some kind of short-term financial improvement (which its bankruptcy-improved cost structure already largely has), some short-term sales results (which it did in October, although only with massive incentives) and some future upside to attract at least some investment. The government increasingly sees its stake in GM as a political liability, and will rid itself of its stake before the 2012 election season at nearly any cost. All of which will add up to somewhere between $25b and $40b in lost taxpayer money. GM’s future success in the market depends on being able to hide that cost, creating a new cultural cancer (not to mention a potential market-share cancer) in the resuscitated patient. Without a clean break from its bailout baby past, GM seems doomed to wind up on the table again.

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25 Comments on “GM Zombie Watch 20: IPO Or Bust...”


  • avatar
    26theone

    Yep great PR for an IPO.  Tell your potential investors that you plan to take 13B of the funds and pay down VEBA which provides absolutely ZERO value to investors via new product, assets, etc.  AS IF people are lining up to dump money into this albatross, the arrogance is unbelievable.

  • avatar
    porschespeed

    Nice summary of  when the optimum time to fleece the dumbest and dimmest will be.

    The sad part is that selling GM-worthless-paper-part-deux to the supremely uninformed is the only hope the American taxpayer has of recovering any of that $50B+.

    At least the IPO will be a success among it’s target audience. Hell, the GM faithful are still trading *old* GM stock – despite basic common sense, warnings from the SEC, and new GM itself that the old paper is worth wayyyyy less than zero.  These people will believe anything that they read, as long as it isn’t based in fact.

  • avatar
    Steven02

    Wny not throw the editorial tag on this article too?  It has so many more opinions than facts.
    Fact:  GM was cash flow positive for this past quarter.
    Fact:  GM plans to turn profits in FY2010.
    Fact:  GM’s balance sheet is pretty much better before bankruptcy and when all lingering bankruptcy costs are pulled out, GM will likely to be able to pull profits in down markets even if those down markets persist.
     
    The true arrogance is refusing to see anything that GM does as positive.

    • 0 avatar
      wsn

      Fact:  GM was cash flow positive for this past quarter.
      Fact: GM’s creative accounting claims to be cash flow positive to make its political master look good. It simply state income in this quarter and delay charges to the next. Expect HUGE HUGE write offs within one year.


      Fact:  GM plans to turn profits in FY2010.
      Fact:  Millions of Americans plan to loss weight in the new year. Guess how many achieved that.

      Fact:  GM’s balance sheet is pretty much better before bankruptcy and when all lingering bankruptcy costs are pulled out, GM will likely to be able to pull profits in down markets even if those down markets persist.
      Fact: GM is a car company, not an accounting firm. So it doesn’t add value if they can do creative balance sheet. They are still being depressed in the market. The outlook is dim.

  • avatar
    sbelgin

    Time to boycott GM altogether.  They have no intention of a payback and they will go under anyway due to ineptness.  We got screwed! Only way to avoid getting screwed more is to force this dog to close down now . If you want buy American (what ever that means), buy a Ford to ease your conscience.

  • avatar
    gslippy

    Unless GM can close the ‘perception gap’, an IPO will ultimately be irrelevant.

  • avatar
    lahru

    The money available is what is called a bridge loan. Commonly used to build something, a house or cusiness and you are approved for so much credit based your ability to repay. In this case, GM was given a line of credit this was and a total dollar amount was decided and the money was placed in an account. They have used part of it for continued operations and some has remained in an account that requires government approval for use. They[GM] are lowering their credit line by said amount and calling that as ” we plan to start paying back the gov’t in December.
    The “news” of GM starting to pay back the gov’t in a press release is genius if it were not for those of us who understand what is going on. Great press, good news for the masses and look for more of this shit in the future.
    Lowering my own credit line at my bank is not a payment on my loan, it is a lowering of my credit line and simply that.
    The gov’t is using GM to promote the  recovery of our economy and will no doubt use the rented bitch for all it is worth. God knows it just might work. But in the end? GM fails.

    • 0 avatar
      ChristyGarwood

      lahru, let’s pretend that I borrowed $1M from you at 5% interest and agreed to pay it back in in yearly installments from 2011 to 2015.  After six months, I decided I didn’t really need the entire $1M.  I send you $200,000 early in 2010, with interest of course.  You would really call that a line of credit and not paying back my loan?

      from a curious GM employee

  • avatar
    mtr2car1

    @Steven02

    this is about as honest an assesment you are ever going to get.
    Fact – they did have positive cash flow for the quarter – Truth, it’s because they didn’t spend any money and freely admit that what they didn’t spend is going to flow out the door in Q4

    Fact – they plan to turn a profit on FY2010 – Mystery; How much?  One dollar, a billion dollars?  They have yet to show that they Indeed can profit off 10.5 SAAR.

    Fact – their balance sheet is better and it should help.  Truth – Yep, but will it?

    • 0 avatar
      Steven02

      The restructuring isn’t complete.  They still have some restructuring costs to take care of.  What I am trying to say it isn’t the doomsday picture that Edward is presenting.  Will GM pay back all of what they were loaned?  No.  I don’t think that there is anyway that the IPO will be high enough to make it worth while.  But, I am not sure that the gov’t is going to sell all of its shares then either.  It is conceivable that the gov’t might hold on to shares in hopes of increasing value.  I doubt this as well though.
       
      If GM’s balance sheet is better, IS is better, CF is better, it will help the IPO.  There is no way that it won’t help the IPO.  What GM needs to do to make is successful?  Turn profits before going IPO (at least break even in the US market), get Europe back in order (Opel), keep sales in Asia strong.

    • 0 avatar
      ChristyGarwood

      mtr2car1, if I have a business model that says I will turn a profit AFTER I sell 10% of a 1.2M unit annual market, wouldn’t I show a loss in the first three quarters I am in operation since I haven’t hit the 12 month mark yet?  Or would you expect me to show a profit in every quarter I exceeded 30K units in sales?  The last time I took an economics course, I recall that I couldn’t show making a profit until my fixed costs were paid for…

  • avatar
    tpandw

    At least in my version of TTAC, this piece is labeled as an editorial.  I don’t see recognizing the reality about GM as arrogance.

  • avatar
    Ken Elias

    Just some facts.  GM’s debt structure today is considerably different from pre-bankruptcy.  But it’s irrelevant since GM today is not the GM of yesterday…that’s MLC – Motors Liquidation Corp – which owns the assets not sold to the new GM.  GM’s fresh start accounting, when unveiled, will show a balance sheet that is relatively clean for a company doing $100+ billion in revenues annually.
    GM’s capital structure – which includes debt, preferred stock, and common stock – is set for now and its debt today is only $10.5 billion or so (including the pending issuance of the UAW VEBA note of $2.5 billion).  GM will (as of the creation of the VEBA plus some already issued to the Treasury) also have $9.0 billion in preferred stock paying a 9% dividend.  The balance is all common equity of which the Fed’s own 61% with the UAW, the Canadians, and the former unsecured bondholders owning the rest.
    GM’s motives are to score a PR coup by beginning early retirement of the Treasury debt – a headline it got today.  Most Americans just will recall the headline of “payback” and see the positive.  But for executives of GM, retiring the Treasury debt may also free it from TARP restrictions on exec pay – a big motivator for getting it wound down to zero sooner rather than later.  Fritz couldn’t answer whether or not the pay restrictions will stay in place with the Treasury as a stockholder…my guess is that since it would then be an equity stake only, gov’t restrictions go away since GM is a “private commercial entity” and exec comp is a determination of the Board.  TARP funding would be extinguished.
    It is too early to make a call on GM’s results and predict the future.  Any improvement in the overall market – with GM maintaining its market share – will make this company profitable.  What it will be valued at when the IPO does occur is anyone’s guess for now…but it’s going to be a stretch for the gov’t to recoup all of its investment in old and new GM.
     
     

  • avatar
    PeteMoran

    Motley Fool always have interesting take on things.
     
     
    I would stake what’s left of my manhood that any GM IPO would fail spectacularly.  Only the very very top tier of projects/companies are able to raise money at the moment. Our people see this continuing for some years yet.
     
    Let’s say, an IPO might be $10b for 5% of the company? GM might be suggesting a bunch of teachers and municipalities will get together to raise $10b maybe??? Where is that money gonna’ come from. No-one in the USofA has it and the ones that do won’t be sinking it in”old skool” auto manufacturing. Those people are already in Toyota. Or Ford.
     
    BTW, the previous largest ever IPO was about $19b in 2006 for an organisation that already had substantial assets and revenues.

  • avatar
    lw

    Don’t be distracted by the short term financial numbers.  GM has a long and proven track record of two things.
    Proven Fact #1) GM is a superstar when they grow.  Decades of growth proved that.  When they sell more cars every year, year over year, they are rock stars.  They produce great products, they have great marketing and they have a license to print money.
    Proven Fact #2) GM is horrendous when they shrink.  Decades of shrinking proved that.  They produce odd products.  Appear desperate.  They have a license to burn money.
    Show me quarter over quarter of increased sales and I will start to believe.
     

    • 0 avatar
      PeteMoran

      Didn’t it turn out that during “Growth” periods, they weren’t funding their future liabilities expecting that tomorrow’s problem never arrives.
       
      (But then it did of course, and many of those hard working people are suffering).

      • 0 avatar
        lw

        Funding future liabilities doesn’t matter if you have year over year growth forever.  When you grow forever you can run the business like a Ponzi scheme.
        So what if 50,000 people retire in the next 5 years, you will hire 60,000 to replace them and keep up with the growth.  You can always count on growth to make the budget work.
        Of course in the real world things don’t work that way, otherwise we would have to trim the trees in our yards so that 747s wouldn’t run into them.
        The Ch. 11 reset GM’s volume baseline.  Let’s say the starting line was moved from 30% market share in a 15M unit market to a 20% market share in an 11M unit market.  That’s fine.
        But GM’s business model/architecture must then GROW year over year from that new starting line.

  • avatar

    excellent anaylsis, well written and spot on.

    four years ago I called for Wagoner’s head, coined Red Ink Rick. LaNaive was another disaster I spent years blasting, along with Board of Bystanders. maybe my best tho is Red Toe Tag as it’s really become mainstream. the point of all of it remains that until GM changes it’s marketing (which current mgt is incapable of), the results won’t change, only the excuses.

    distress merchandising drove this company into BK, now the dumb a$$e$ are actually repeating the same programs. when combined with SFE, value certs for ordering additional units, old invoice credits, conquest coupons, vouchers for this and that, and the new BFE facility program, it’s for certain that Chapter 7 is more likely than an IPO.

    • 0 avatar
      Lug Nuts

      Why would these people change?  Post-bankruptcy, lots of the upper-crust white collars still had a cushy job, despite boundless incompetence prior to bankruptcy.  In their special way of thinking, what’s old is new.  No way will they rock the good taxpayer ship lollipop while it’s still chock full of 100 grand bars.  It’s just business as usual with mega bonuses as often as possible until the ship finally slips under the economic waves.

  • avatar
    rnc

    I don’t really care about GM either way, but let’s understand how an IPO works….Investments banks (Merrill, Goldman, etc.) in reality buy the stock, lets say GM issues 1 Billion shares, those companies will pay $10-$15/share (this amount is guaranteed to GM), when the shares are sold onto the market, anything above the amount paid by the investment banks to GM is kept by them (that’s thier incentive), while the GM gets the upside on it’s balance sheet (the downside is obvious here).  Taking the downside into account there will be no IPO until such time that the investment banks ok it.  When the investment banks ok it (which they really shouldn’t have any trust but they do), the shares are first made available to large institutional investors and when you take them into account, $10-15 billion dollars is not a great deal of money).  I imagine that GM will end up with 3-4 billion shares outstanding, the upside (possible payback) will come from the remainder of the shares being sold on the open market, if GM is profitable that shouldn’t be a problem.  It all really just depends on what happens in the next year.

    • 0 avatar
      PeteMoran

      A $10-$15b raising is massive even in good times, and only for a company with some substance. I expect you can count the number of $10b IPOs on both hands, or at least with one or two toes at most.

  • avatar
    FleetofWheel

    Unless the Obama admin puts pressure on them, I don’t see why institutional investors would buy into the new GM when it goes public.
    Since most large investors are re-discovering basic financial principles after the recent bubbles, how could they in all due diligence invest in such an weak enterprise as new GM?

  • avatar
    jmatt

    >>> GM needs to fund its VEBA pension funds to the tune of $13b by 2013

    Since the company is doing so well that it can already afford to pay back the taxpayers, the UAW should be rewarded by having their $13 billion pension shortfall paid for with GM stock.  I mean, they’d leap at an opportunity like that, wouldn’t they?

  • avatar
    wsn

    Given that GM stoke holders and bond holders were screwed as recently as this year, who would want to buy new GM IPO?
     
    The only way I can think of is that Obama uses his presidential power to force certain pension funds to buy it. He will claim anyone who dare to refuse greedy terrorists and publish their home address.

  • avatar
    ASISEEIT

    Good ole Waggoner and the board of directors did such a wondeful job destroying G.M.’s North American Operations they’re going to have a tuff time”Re-assembling” the remaining structure!! You see the whole point was to eliminate employees, retirees, health care, pensions, and living wages all in north America but all the while opening up new facilities in Russia and  China to name a few. G.M. had “PLENTY” of good people OUTSIDE G.M. giving them correct advice but if you build vehicles the public will love and market them and service them correctly here in north America it would be impossible to destroy N.A.O.’s without giving away your alterior motive!!!


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