The GM IPO: professional optimism or business sense?
By: Dr Peter Wells, Thursday, August 19, 2010, AutomotiveWorld.com
The launch of an IPO is a major event in any corporate history, which if badly handled or simply ill-timed can seriously undermine the prospects of the business and confidence in the senior management team. If the offer price is pitched too low, and the offer is heavily over-subscribed, then clearly a revenue-raising opportunity has been lost. If the offer price is too high, and the offer is heavily under-subscribed, at the very least the underwriting banks will have significant costs to bear.
The case of General Motors is of course special. Not only is the company very large in IPO terms, it is essentially owned by the US treasury albeit with other government and pension interests. This inevitably makes the IPO more than a business event; it is also a political event. Many are seeing the IPO as a test of whether the Barak Obama policy towards GM and the US automotive industry will be vindicated, and whether the US public will ever get back the US$50bn in government funds invested in the company.
Many are seeing the IPO as a test of whether the Barak Obama policy towards GM and the US automotive industry will be vindicated
All of which rather obscures the more fundamental issue of whether or not the IPO is appropriate in terms of timing and indeed scale. It seems unlikely that the entire business will be offered at one time - that would make for a funding request to the markets of unprecedented size - but whatever the ultimate scale of the IPO the question remains as to whether GM is fit and ready to once again be an independent business.
In many respects the prognosis is good. There is little doubt that GM has re-sized the entire operation in North America to more closely align production capacity with market demand in what can only be described as a new realism. Crucially, GM hopes to have established its new capacity to match the base of the economic cycle, so that even in poor market conditions the business can still run profitably. Similar rationalisations in brands and dealerships will also drive down long-term costs. The recently reported quarterly profit is surely also some vindication of these steps and the managerial changes enacted since the crisis.
It may well be that the shock of government rescue and the huge scale of the preceding losses has enabled a culture change within GM
On the other hand, the results from a couple of quarters hardly make for a long-term track record of performance. A key concern for those that might purchase GM shares will be whether or not the business has changed sufficiently to ensure the long-term slide in market share and brand strength has been halted. While GM has some exciting product offerings and ideas around electric vehicles, these are more of medium-term potential. And while the market in China has been a powerful aid to GM, Opel in Europe continues to report losses.
It may well be that the shock of government rescue and the huge scale of the preceding losses has enabled a culture change within GM, particularly at senior management level. Ultimately this is what the IPO is all about, and only then will it be clear if it is a case of professional optimism or business sense.
Dr Peter Wells is a Reader at Cardiff Business School, where he is a Co-Director of the Centre for Automotive Industry Research and leads the automotive industry research programme within BRASS, also in Cardiff University. Dr Wells is also a director of AutomotiveWorld.com's sister website AWPresenter.com. He can be contacted on wellspe@cardiff.ac.uk.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.
Published on Thursday, August 19, 2010
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