By on August 18, 2010

The most interesting section of every S-1 filing is undoubtedly the “risks” section, in which companies are legally compelled to disclose all possible material risks associated with investing in their IPOs. Unfortunately, these risks are typically overstated, as no firm on the verge of going public wants to run into trouble with the SEC for under-reporting risk. As a result, many of the risks disclosed are fairly mundane, everyday risks in the world of business (currency, commodity price, and other economic fluctuations, etc). At the same time, companies rarely give reporters a full tour of their major risk areas the way these sections do, so they’re usually worth a read. GM’s just-released S-1 filing is no exception…

Sure enough, the first several disclosures are mundane in the extreme.

Our business is highly dependent on sales volume. Global vehicle sales have declined significantly from their peak levels, and there is no assurance that the global automobile market will recover in the near future or that it will not suffer a significant further downturn.

Our ability to attract a sufficient number of consumers to consider our vehicles, particularly our new products, is essential to our ability to achieve long-term profitability.

These repetitions of simple business facts might seem like compliance boilerplate (probably because they are), but given GM’s history, one can’t read certain lines and not feel that, on some level, a whole lot has changed ’round RenCen way. For instance, on the second risk factor listed above, the filing elaborates

The automotive industry, particularly in the U.S., is very competitive, and our competitors have been very successful in persuading customers that previously purchased our products to purchase their vehicles instead as is reflected by our loss of market share over the past three years. We believe that this is due, in part, to a negative public perception of our products in relation to those of some of our competitors. Changing this perception, including with respect to the fuel efficiency of our products, will be critical to our long-term profitability. If we are unable to change public perception of our company and products, especially our new products, including cars and crossovers, our results of operations and financial condition could be materially adversely affected.

Amen! Meanwhile, a pattern emerges: generic headings followed by generic description, capped with a kernel of specificity. One warning on the need to constantly improve production efficiency concludes with the admission that

Reducing costs may prove difficult due to our focus on increasing advertising and our belief that engineering expenses necessary to improve the performance, safety, and customer satisfaction of our vehicles are likely to increase.

But some warnings never quite get specific enough, particularly when disclosing risks that have been chronically problematic for GM in the past (supplier failure risk, cash flow risk, currency loss risk). On the other hand, GM is a new company now, with new management and a new balance sheet… perhaps history is no longer so important.

But the very newness of New GM, particularly the newness of its incoming top executive (Dan Akerson) is a risk unto itself. In perhaps the strangest disclosure of the document, GM admits that

The ability of our new executive management team to quickly learn the automotive industry and lead our company will be critical to Within the past year we have substantially changed our executive management team. We have elected a new Chief Executive Officer who will start on September 1, 2010 and a new Chief Financial Officer who started on January 1, 2010, both of whom have no outside automotive industry experience. We have also promoted from within GM many new senior officers. It is important to our success that the new members of the executive management team quickly understand the automotive industry and that our senior officers quickly adapt and excel in their new senior management roles. If they are unable to do so, and as a result are unable to provide effective guidance and leadership, our business and financial results could be materially adversely affected.

Yikes! But if you think that’s scary, check this out: the most specific, yet cryptic, and totally terrifying disclosure of the bunch

Our management team for financial reporting, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our internal controls. At December 31, 2009, because of the inability to sufficiently test the effectiveness of remediated internal controls, we concluded that our internal control over financial reporting was not effective. At June 30, 2010 we concluded that our disclosure controls and procedures were not effective at a reasonable assurance level because of the material weakness in our internal control over financial reporting that continued to exist. Until we have been able to test the operating effectiveness of remediated internal controls and ensure the effectiveness of our disclosure controls and procedures, any material weaknesses may materially adversely affect our ability to report accurately our financial condition and results of operations in the future in a timely and reliable manner. In addition, although we continually review and evaluate internal control systems to allow management to report on the sufficiency of our internal controls, we cannot assure you that we will not discover additional weaknesses in our internal control over financial reporting. Any such additional weakness or failure to remediate the existing weakness could materially adversely affect our financial condition or ability to comply with applicable financial reporting requirements and the requirements of the Company’s various financing agreements. [Emphasis added]

Did GM just admit that its financial reports may not be accurate? What in the Wagoner is going on here? Anyone? Bueller?

GM also discloses that it will continue to be at least partially owned by the US Treasury after the IPO, and as a result

the UST is able to exercise significant influence over our business if it elects to do so. This includes the ability to have significant influence over matters brought for a stockholder vote. To the extent the UST elects to exercise such influence over us, its interests (as a government entity) may differ from those of our other stockholders and it may influence, through its ability to vote for the election of our directors, matters including:

The selection, tenure and compensation of our management;
Our business strategy and product offerings;
Our relationship with our employees, unions and other constituencies; and
Our financing activities, including the issuance of debt and equity securities.

And yet, bizarrely, GM claims that government ownership might actually make it subject to increased regulation rather than preferential treatment.

In the future we may also become subject to new and additional laws and government regulations regarding various aspects of our business as a result of participation in the TARP program and the U.S. government’s ownership in our business. These regulations could make it more difficult for us to compete with other companies that are not subject to similar regulations.

In a similar vein, GM still says there’s a risk that it won’t receive $14.4b in section 136 (ATVM) retooling loans from the Department of Energy. But that’s only because the money isn’t actually in GM’s bank account yet. The DOE has been dragging its heels on GM’s request, but according to the most recent reports, DOE was waiting for positive financial numbers to prove GM’s viability. With two quarters worth of positive results released since then, one wonders why GM still hasn’t received notice on that $14.4b loose thread. Still, as long as the Treasury maintains even a reduced stake in GM, it’s difficult to imagine GM being singled out for regulation or denied loans. On the other hand, GM discloses that the  dealer cull which was one of its bailout conditions has hurt its market share. So there’s some precedent for GM’s government equity stake being counterproductive.

And then there are other, bigger issues: the $27.4b pension shortfall, the possible bankruptcy of Opel/Vauxhall, the lack of a stock dividend, the possible devaluating effect on common stock prices of Series B preferred stock, the restrictions on executive pay, the VEBA contributions, the debt. All told, there’s a mountain of risk attached to GM’s IPO. Individually the disclosures may seem mundane, but taken together they illustrate the breadth of the challenge facing GM’s turnaround… and that financial controls disclosure is just plain scary.

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21 Comments on “GM’s S-1 IPO Filing: The Risks...”


  • avatar
    gslippy

    1. “Our business strategy and product offerings”

    Translation: “The government may still pursuade us to build cars the government says people want, namely the Chevrolet Volt & Opel Ampera, even if we lose money on every one we sell.”

    2. “If we are unable to change public perception of our company and products, especially our new products, including cars and crossovers, our results of operations and financial condition could be materially adversely affected.”

    Finally, an admission by Captain Obvious that the pesky perception gap thing is killing them, but they only mention it in relation to fuel efficiency, but not GM’s legendary inattention to quality, value, and consumer appeal. Maybe they really do think people want the Volt.

    • 0 avatar
      dhathewa

      qslippy: “Translation: “The government may still pursuade us to build cars the government says people want, namely the Chevrolet Volt & Opel Ampera, even if we lose money on every one we sell.””

      Strange… I recall the Volt decision was made prior to the bankruptcy.

    • 0 avatar
      Robert Schwartz

      It is not a perception gap in the real world, those of us who spent our hard earned money on GM cars, only to emerge from the experience feeling ripped off, have no reason to go back. I didn’t just perceive that my 2 month old Chevrolet had rust spots. It had them.

    • 0 avatar

      The government actually questioned the wisdom of the Volt and noted that it would not likely be profitable in the short term, at least. I’d hardly say that the government was encouraging them to build the Volt.

      And why would the US government care if they sold an Opel Ampera or not?

    • 0 avatar
      gslippy

      @dhathewa: The Volt’s development certainly predates GM’s bankruptcy, but a ‘normal’ bankruptcy might have caused GM to jettison the project because it will never make money. Obama & Co. keep reminding us that GM will now build cars ‘Americans want’, and the green Volt is to be the centerpiece.

    • 0 avatar
      rnc

      I don’t understand the comment regarding a normal bankruptcy, the bankruptcy and what it eliminated is what allowed the accelerated development of the volt and everything else said regarding it has been said before (mostly in relation to the prius). Since the government won’t handle fuel economy and choice through taxation and instead will rely on CAFE companies will have to find a solution to the problem, if losing money on one Volt will allow them to sale 10 incredibly profitable full size pickups then the investment is worthwhile (but management shouldn’t think that far out) and if it works…wait that could never happen.

    • 0 avatar
      CamaroKid

      This argument is not only wrong, but it is plain silly.
      So the same government that is forcing GM to build the unprofitable Volt ’cause its “green” is also forcing GM to build the unprofitable ZR1, CTS-V, CTS V-Wagon, CTS-V Coupe ’cause they are all green too?

      Sorry but the facts don’t support what you are saying… Rick, Lutz, Fritz and everyone else at GM was so committed to the Volt that to kill it now would be basically admitting that 5 years of corporate ego was wrong. Even if a Bank had offed the DIP financing instead of the Government in 2008… The Volt would have been the LAST car that got cut.

    • 0 avatar
      rnc

      “This argument is not only wrong, but it is plain silly.
      So the same government that is forcing GM to build the unprofitable Volt ’cause its “green” is also forcing GM to build the unprofitable ZR1, CTS-V, CTS V-Wagon, CTS-V Coupe ’cause they are all green too?”

      Now that makes no sense “kid”.

  • avatar
    Sinistermisterman

    So in other words…
    1 – We’ve learnt from some of our mistakes, or we want others to think that we’ve learnt from our mistakes.
    2 – We’ve got some new executives in charge who may or may not know what they’re doing.
    3 – We still can’t accurately report whether we’re really making any money or not.
    4 – The government still has a big stake in the business and may or may not overrule what the shareholders want.
    5 – If it all goes wrong then it’s probably the governments fault for being vindictive.
    Time to short some GM shares…

  • avatar
    carguy

    I wouldn’t read too much into the “Risk” section of an IPO – it’s much more of a legal disclaimer than a serious risk analysis.

  • avatar

    The “controls” thing is something Liddell has talked about in past calls… basically, the financial bureaucracy got out of hand. He has imposed a whole big dose of Get Real on the place, but I think he won’t swear to it until he’s got 4 quarters’ worth of comfort with the current system.

    Also, the lack of a dividend is not an issue… or at least a much smaller issue than an attempt to pay a dividend at this stage of their turnaround would be. THAT would be a red flag.

    • 0 avatar
      pnnyj

      I wouldn’t be so quick to dismiss the section on financial controls. Remember what Steve Rattner had to say about GM’s finance operation:

      “Everyone knew Detroit’s reputation for insular, slow-moving cultures. Even by that low standard, I was shocked by the stunningly poor management that we found, particularly at GM, where we encountered, among other things, perhaps the weakest finance operation any of us had ever seen in a major company.

      For example, under the previous administration’s loan agreements, Treasury was to approve every GM transaction of more than $100 million that was outside of the normal course. From my first day at Treasury, PowerPoint decks would arrive from GM (we quickly concluded that no decision seemed to be made at GM without one) requesting approvals. We were appalled by the absence of sound analysis provided to justify these expenditures.”

      http://www.thetruthaboutcars.com/rattner-on-his-detroit-adventure/

    • 0 avatar
      rnc

      During ChryCo’s dark hours, right after Iacocca took over, Chrysler was down to less than 3 hours of operating cash left and Iacocca approved a $3 million renovation of the corporate penthouse in NYC (harvard case study from college).

      Basically at that point GM knew it was toast and said F’it and banked on the government intervening, just as Chrysler had done before (ofcourse I think thier assumption was that the billions would just be handed over and things would be allowed to continue as is, as they had not even begun to prepare of BK).

      It’s amazing that Chrysler lasted as long as it did with Iacocca running the show (remember a board coup forced him out as he wanted to just keep making K-cars) and he is a folk hero of sorts.

  • avatar
    John Horner

    Hah, you should have read the risks section of the Pixar or Google prospectuses :).

    • 0 avatar
      gslippy

      Were they emerging from bankruptcy at the time, burdened with 40 years of declining market share, poor accounting, and a perception gap about their products?

  • avatar
    jkross22

    “GM is a new company now, with new management and a new balance sheet… perhaps history is no longer so important.”

    Ed, Surely ye jest!

    GM is a new company now – boy, that’s an entire article on it’s own. It’s a new company in that it got to eliminate enormous debts from it’s BS. GM’s culture of mediocrity and hit and miss dealer network is very much the same company until they prove otherwise on a large scale.

    With new management and a new balance sheet – Yep, there are new managers and a new BS. There are also a bunch of old managers and an old culture. Time will tell which one prevails.

    Perhaps history is no longer important – History is always important, and GM will be doomed to repeat theirs if they believe otherwise.

  • avatar
    Educator(of teachers)Dan

    Here’s why I love the italicized passage in the article. GM basically admits they’ve been lying to themselves for so long, they believe their own bullsh** on an institutional level. Remember kids, admitting you have a problem is the first step to solving it.

  • avatar
    jmatt

    >>> adversely affect our ability to report accurately our financial condition and results of operations in the future in a timely and reliable manner.

    Yup. That sounds just about right for a government operation.

    >>> In a similar vein, GM still says there’s a risk that it won’t receive $14.4b in section 136 (ATVM) retooling loans from the Department of Energy

    So, $100 million from the public sector back to the private sector, and a $14.5 billion dollar transfer from the private sector to the public sector.

    So, for every $1 privatized, $145 of taxpayer money goes back into the company welfare fund. Mission Accomplished.

  • avatar

    The biggest landmine in my opinion is recalls – the S1 shows they spent 0.2 billion in the last six months alone on warranty claims and the heated washer fluid recall. GM’s average recall per year must be north of 4 or 5 at the least, given that most vehicles have a recall or two in their lives and GM vehicles certainly wouldn’t beat the average. Too bad the filing didn’t show the costs of recalls for the last five years.

  • avatar
    akitadog

    Ed, that’s hilarious how you “fine-printed” your last paragraph, with smaller font-size.

  • avatar
    Norma

    My question is: when will the Treasury and the board realise that they’re wearing rosy glasses and be smart enough to find a convenient excuse to shelf this IPO?


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