Want to underwrite one of the largest initial public offerings in history? Chop your usual fee by three-fourths and commit to limiting Wall Street’s windfall.
That was the deal David Miller and Tim Massad, the unheralded government architects behind the General Motors Co stock offering, gave investment banks interested in handling the deal. When the two US Treasury officials made their expectations clear: “We could kind of hear their jaws drop over the phone,” said Massad, Bloomberg Businessweek reports in its November 29 issue.
Massad, acting assistant secretary for financial stability, and Miller, chief investment officer for the Troubled Asset Relief Program, were President Barack Obama’s dealmakers on the November 17 sale of GM stock, along with two Obama aides — manufacturing czar Ron Bloom and economic adviser Brian Deese.
The IPO, led by JPMorgan Chase & Co and Morgan Stanley, was a nail-biter for Massad and Miller, who also manage the government’s bank and insurance company investments.
“You want the deal to go well” without looking overly optimistic in pricing the shares, Miller said: “At the same time, we don’t want it to go up way too much” because that would mean taxpayers left money on the table on the first day of trading.
GM’s shares, initially priced at $33, rose 3.6 per cent on November 18, the first day of trading — exactly the “sweet spot” Miller and Massad wanted. Of the nearly $20 billion raised, almost $12 billion went to the US. Treasury officials “passed with flying colors,” said Jay Ritter, a finance professor at the University of Florida in Gainesville who studies IPOs.
No Break Even
Taxpayers, however, haven’t broken even on GM. The government needed to sell its entire stake for about $44 a share for that to happen. The US would need to sell its remaining 37 per cent ownership of GM at $53 a share for taxpayers to be made whole.
Miller and Massad said they weren’t waiting for the stock to reach that level. “We’re not a private equity fund,” Massad said: “We believe that promoting financial stability means we should exit as soon as we can.”
Of the $50 billion the government gave GM in 2008 and early 2009 when the auto industry was near collapse, Treasury says it will recover $9.5 billion through interest, loan repayments, and preferred stock dividends.
Ultimately, the government may lose $5 billion to $7 billion of the $85 billion auto industry rescue effort, Steven Rattner, former head of the President’s auto task force, said in a November 17 Bloomberg Radio interview.
Banking Fees
Investment banking fees were one of the trickiest parts of the deal, said Herb Allison, the former Fannie Mae and Merrill Lynch executive who led Treasury’s financial stability office from June 2009 through September 2010.
If the government were too soft on the investment firms, Wall Street would profit at taxpayers’ expense. If too strict, the best firms might walk away. “That was a difficult decision,” Allison said of Treasury’s demand for a 0.75 per cent fee. “I think it proved to be the right one.”
Massad is a former corporate lawyer at Cravath, Swaine & Moore who has worked on hundreds of IPOs, although this is his first one as the client. He earned undergraduate and law degrees from Harvard.
Miller worked on deals in Goldman Sachs Group’s special situations unit, laying the groundwork for his job managing Tarp’s complex mix of preferred shares, common stock, warrants, guarantees and dividend agreements. Before going to Harvard Business School he studied economics at Dartmouth, where he also minored in film studies.
Auto Stake
The pair’s labours aren’t over yet. They still need to manage the rest of the government’s auto stake, along with its holdings in American International Group Inc, Citigroup, and hundreds of smaller institutions.
