By on August 17, 2010

GM’s IPO filing still has yet to appear on the SEC’s EDGAR database, but while we wait for the S-1 form to clear, Reuters has some details on what to expect from the sale. The big news:

GM is mulling a plan under which sovereign wealth funds or pension funds would serve as “cornerstone investors,” a technique often used for large initial public offerings to show that key investors are supporting the deal, four people said…

Each cornerstone investor would likely be asked to commit to buying 2 percent to 10 percent of the IPO and cornerstone investors would likely account for 10 percent to 30 percent of the total IPO, one of the sources said.

On the other hand, another source says GM is targeting 15 percent of its equity towards cornerstone investors, with 20-25% is aimed at the retail investment market. Either way, Reuters points out that another recent large IPO of a government-owned business, the Agricultural Bank of China, relied heavily on cornerstone investors… but that the politics of such a strategy could be risky.

After all, Chinese, Indian and Latin American investors have strong incentives to invest in GM, which has strong presences and growth opportunities in those regions. Indeed, GM’s Chinese partner SAIC has already bought out the majority stake in its Shanghai GM joint venture, and took over GM’s Indian operations. Other politically unpalatable but very possible cornerstone investors: Arab sovereign wealth funds, Russian oligarchs, or labor union pension funds. If any of these investors buy up large chunks of GM equity, the auto bailout will suddenly be seen as taxpayer support for overseas investors or a favor for the politically well-connected unions. And since both auto task force boss Ron Bloom and TARP boss Herb Allison

have been consulted on the question of how to balance access to the offering by retail investors against the potentially competing goal of maximizing returns for U.S. taxpayers.

the White House won’t be able to avoid any political fallout from (for example) headlines proclaiming a part-Chinese-owned GM.

On the other hand, getting a big investor to go large on a GM IPO could help reassure the market, which is understandably hesitant about GM’s return to public trading. But who’s got $2b to drop in a single big bet on a troubled, recently-bankrupt automaker? If GM’s can find two such investors with no major political downsides, they’d be crazy not to woo the hell out of them. But who could such investors be? Or will GM throw politics to the wind and end up in the arms of their Chinese partners? Scenario me…

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26 Comments on “Ask The Best And Brightest: Who Will Be GM’s “Cornerstone Investors”?...”


  • avatar

    This is EXACTLY the kind of thing that the smartest guys on Wall St would ask Warren Buffett to come in on in a big way. It’s also the kind of investment Buffett might — *might* — actually take a look at, at the right price. There’s probably no more than a 10% chance that he would commit actual money to GM stock — he’d have to be really, really sold on management. But don’t be completely shocked if it happens.

    • 0 avatar
      don1967

      In the sense that Warren Buffett possesses a remarkable ability to sniff out hidden value, and assess the probability that it will yield dividends, there is conceivably some potential appeal in General Motors. But if that was the case, he would have bought it awhile ago at distress-sale prices. Not as a hyped-up IPO.

      More relevant, I think, is Buffett’s preference for reliable money pipelines that can be bought at a discount to their future cash flows. With that thought in mind, I expect him to buy GM just as soon as pigs fly.

    • 0 avatar
      MikeAR

      No, no, no Warren Buffett isn’t some investing genius or at least hasn’t been for a long time. He wins now by rigging the game in his favor. He is a friend of entrenched management and a praticing crony capitalist. His specialty is finding a company with a decently strong franchise needing some help to weather a storm. He will then move in and structure his investment to benefit himself to the detriment of the current investors.

      Also he is a very strong proponent of the death tax. Berkshire Hathaway buys a lot of small to medium sized family owned companies when the founder dies and the heirs have to sell the company to pay the estate tax. They have to sell at a very favorable price to Buffett because it is a forced hurried sale.

      There is nothing good about him at all.

    • 0 avatar
      don1967

      @MikeAR,

      If Warren Buffett is no investment genius, then why do you provide so much evidence to the contrary?

      The bottom line is that guy has made more money for himself and his shareholders than 99.9% percent of investors will ever know. Which is why – to stay on topic – he is unlikely to piss it away on GM unless there is some hidden value that most of us are missing.

    • 0 avatar
      MikeAR

      Don, was Pablo Escobar an investment genius? By your standards, yes. After all, he made lots of money and it’s results that count. No matter that he did it illegally. Same with Buffett. Rigging hte game in your favor isn’t genius, Buffett is no better than a mafia don.

    • 0 avatar

      MikeAR, these are very interesting points. Bear in mind, though, that he still has to make the best offer – that is, if he did not step in, the companies would have had to accept the next lower offer and so would be worse off.

      He would be like a Mafia don only if he invented the death tax himself – he is simply taking advantage of the tax situation existing on the ground.

      Of course now that I see his self-interest clearly, his love of the death tax is a lot more understandable.

      D

    • 0 avatar
      don1967

      MikeAR, please. Why would anyone buy a business if not to serve their own personal interests? And since when is the legitimate exploitation of tax law by private citizens a sin? It’s what lawyers, accountants, financial planners and millions of other people do for a living every single day.

      Only the most jaded Marxist would compare these activities to those of a murderous drug lord.

  • avatar
    Educator(of teachers)Dan

    Companies headquartered in China and wealthy Chinese individuals. Not trying to start something, just being honest.

  • avatar
    don1967

    The only interest China could possibly have in GM would be in physically taking over the company for its production capacity. But as a paper investment… HA! China is still gagging on all the bad American paper it swallowed before the subprime mortgage meltdown.

  • avatar
    Telegraph Road

    I hope the U.S. Treasury does what is best for the country and purchase as many shares as needed to keep the share price high. IMHO it’s best to sell the equity slowly and opportunistically to maintain a high valuation.

    But I can understand why GM management wants to sell as much equity as possible as quickly as possible–no more ridiculous taunts of socialism or government/obama motors.

    • 0 avatar
      MikeAR

      You buy the stock, sell everything and borrow and buy all you can. Don’t you expect to mooch off me to save the union jobs. You do your patriotic duty and buy until it hurts. But don’t expect my tax dollars to bail out that piece of crap again.

      It should have never been bailed out by the government in the first place and I resent my money helping those ungrateful union thugs.

  • avatar
    Monty

    It might be very tempting for Frank Stronach and Magna International to buy enough stock to be on the board.

    I can’t understand why people get upset about the possibility of Chinese or middle eastern investors buying GM shares – couldn’t they buy shares on the open market? If a Russian multi-billionaire wanted to pick up 10% or more of stock in Ford, or Caterpiller, or even Verizon, what’s to stop him? It’s a free and open market, isn’t it?

  • avatar
    mcs

    Whoever buys it should try to make some good, quick cash by auctioning off dormant brands like Olds and Pontiac to the highest bidders. Those nameplates should be worth something to any Chinese automaker thinking of selling cars here.

    • 0 avatar
      rnc

      The dorment brands were left in old GM, the new no longer has control over (I would imagine that they have a first right of refusal, i.e. if someone else would offer to purchase they would have right to pay same instead).

      What is being implied about foriegn ownership is the same as was implied about Japan Inc. buying america in the 80′s (that didn’t really work out to well for them), the worlds an open place and GM is a multinational company, just as you have the right to buy foriegn stock they have the right to purchase ours (when it comes to defense or energy (sort of) stocks, yes I can understand why those would be protected, but everything else is fairplay).

      Because of China and the absense of debt GM will be looked at as a growth play, certain mutual funds, etc. that have specific rules in thier by-laws will actually be required to purchase to weight (just as funds tied to indexes have to adjust when they do).

      It’s funny as this country spends so much more than it makes into the trillions of $ (funded by the evil outside) and that’s ok, but the evil outside purchasing a % of GM, evil pure evil?

  • avatar
    tparkit

    Washington has a flexible approach to structuring the IPO, and the final format depends on (a) what its partners are willing to do at this time, and (b) the politics of the November election.

    If the IPO happens before the election, look for a small initial offering. This allows Washington to conceal the recipients of the main chunk until after the election. The governing tribe is afraid of another AIG, in which the public discovered that its bailout funds had been channeled to banksters, cronies, and foreign investors.

    The eventual identity of the specific investors is less important than the deal’s structure. The key is that major investors will be looking for Washington to guarantee – up front – that they will win big for solving Washington’s political problem. That means Washington will give the farm away in ways that not immediately visible. A sovereign entity can be paid off in countless ways unrelated to autos; recall how a terrorist’s release from Scotland was discovered to be orchestrated by the UK’s Labour government in exchanged for petroleum contracts.

    That said, who will eventually take a slice? Any player who recognizes Washington has a problem to solve, and wants something Washington can provide in exchange. (And don’t be fooled by the initial buyers; these will be straw buyers, used to conceal the identity of the final owners. The straw buyers will be rewarded for being Washington’s getaway drivers.) Likely suspects include:

    - the UAW
    - China
    - Petrostates looking for a home for their US dollar holdings, and looking to whitewash their radicalism. (It’s instructive how they got the Obama administration – including the President himself – to back the Ground Zero mosque.)
    - US zombie banks.
    - Detroit’s commercial prisoners, like the parts suppliers.
    - Public sector (state/municipal/union) pension funds, which desperately need Washington to bail them out.

    BTW, this is prime time for an Opel deal with the Europeans. The Europeans know they can remove an important, visible negative from the IPO by providing cash. They will want to be richly rewarded for this, all out of proportion to their contribution, and Washington/GM/UAW has a strong motivation to give them our money to make it happen.

  • avatar
    Robert Schwartz

    Every Bank that got TARP money will get a call from Timmy “Tax Cheat” Geithner saying that Rahm says its time to come out and play.

    That is how things are done in the Windy City.

  • avatar
    John Horner

    Ooops, the latest news is that the offering has been delayed for unexplained reasons:

    http://news.yahoo.com/s/nm/20100817/bs_nm/us_gm_ipo

  • avatar
    AaronH

    Cornerstone Investor = Federal Reserve prints a bunch of money and hands it to their “Investment Banks” to buy this pig.

    I think you mean: Timothy “It was Turbo Tax’s fault, dammit” Geithner

  • avatar
    Lokki

    Main investor? George Soros.

  • avatar
    pgcooldad

    Ok, just for laughs … How about Cerberus?

  • avatar
    GarbageMotorsCo.

    Let China invest in them, they’ll own GM down the road anyways.

    • 0 avatar

      Indeed… and I can think of no more fitting end to this ridiculous farce. Having China take control of GM — then eventually closing down the US operations completely (don’t think for a minute they wouldn’t do precisely that) — would serve as the ultimate cautionary tale of why the feds should never interfere with natural economic processes.

      Of course, all that matters is that the UAW bosses get their payouts, and the Dems get elected in November. Everything else is unimportant.

    • 0 avatar
      MikeAR

      Rob, you are absolutely right.


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