GM IPO: It’s usually good news when a company increases the price and size of shares it wants to sell in an initial public offering. It generally means more profit for the company’s owners, more cash for its coffers, or both. That’s not so straightforwardly the case for General Motors. Its decision to augment both price and shares for sale works out as something like a wash for the US government.
That’s largely because the current stakeholders are all cashing out at a loss. Take the US Treasury, which owns 61 per cent of GM. According to the original plan, it could have sold 263.5 million shares at $26 a pop - the bottom of the initial range. GM’s shares would then have had to double before taxpayers got all their money back from selling the rest of the Treasury’s stake. It was a similar story for the Canadian government’s holding.
Increasing the IPO price to $33 a share reduced the government’s potential loss on the IPO, seemingly confirming the Treasury’s new-found emphasis on getting more bang for its buck, rather than simply reducing the government’s stake in the Motown manufacturer come what may.
But the later decision on Tuesday to sell 110 million more shares than originally planned reverses that. The US appears to account for virtually all of the extra stock. Assuming it sells 100 million extra shares, then although Uncle Sam will collect more cash, the price at which it will have to sell the rest of its stake for taxpayers to break even goes back up to just above $52 a share.
The Treasury will have fewer shares it needs to offload in the future. Allowing for dilution from preferred stock, pension contributions and in-the-money warrants, the US stake will drop to around 26 per cent after the IPO, assuming no further changes. But it will still leave US taxpayers $10.5 billion in the red unless and until GM’s shares rise significantly in value.
Of course, a strong-looking IPO is something GM’s advisers, along with the company’s government owners, surely needed to deliver. And, a well received return to public markets can only help boost credibility. But in the short term, the clearest financial win goes to the bankers: at the top end of the latest IPO price range, their combined fee would almost double to $135 million.
