Market Playground

by Dennis “Cos” Costa

General Motors Co. filed its much anticipated IPO paperwork with the SEC to begin the process of selling stock in its restructured company again to the public. The IPO marks the second-step of a process that will position the company to make good on its promise to pay the American taxpayer back the $50 billion investment made to create the new General Motors. The first step GM took to making good on that promise was back in April 2010, when the company announced that it had repaid all $8.1 billion in loans to both the U.S. and Canadian governments as planned with its final payment of ~$5 billion.

The company’s IPO announcement comes just a little over thirteen months from the new company’s formation, and the purchase of all of the old General Motors Corporation assets under an authorized sale under section 363 of the Bankruptcy Code. The new General Motors Co. also acquired the subsidiaries that operate outside of the United States as part of this authorized purchase of old company assets. The bankruptcy protection allowed the restructuring of GM’s debt, wiping out almost all unsecured creditors. The U.S. taxpayer through the Treasury Department, with a $50 billion investment, yielded a 61% controlling interest in the “new” General Motors. In addition, for concessions made by the United Auto Workers (UAW), the union gained control of a multibillion-dollar retiree health-care trust, they received seats on GM’s corporate board, and secured a 17.5% ownership stake in GM with warrants to purchase another 2.5% in the future. The bondholders in the old GM were strong armed into settling for 10% ownership, with warrants to purchase another 15% in the future, bringing their ownership potential to 25%.

With all of the leadership changes that have maneuvered GM to this milestone event of returning to the public markets, it is sometimes hard to remember who it was that gave the outlook speech for the company as it exited the government assisted bankruptcy back then. The day the new General Motors Company closed on the court authorized purchase of assets, we had this from the CEO of the new GM on July 10th, 2009,

“Today marks a new beginning for General Motors, one that will allow every employee, including me, to get back to business of designing, building and selling great cars and trucks and serving the needs of our customers. We are deeply appreciative for the support we have received during this historic transformation, and we will work hard to repay this trust by building a successful new General Motors.

One thing we have learned from the last 100 days is that GM can move quickly and decisively. Today we take the intensity, decisiveness, and speed of the past several months and transfer it from the triage of the bankruptcy process to the creation and operation of a new General Motors.”

– Fritz Henderson, President and CEO GM

GM’s management team did indeed move “quickly and decisively” with Ed Whitacre, Jr., who oversaw the creation of the “new” AT&T, as GM’s Chairman through the turnaround period.  Whitacre, together with Fritz Henderson, who was asked to continue as President and CEO of the new GM, now had some breathing room and a plan, and were eager to implement it.

Henderson’s appointment came after the Obama administration forced the then CEO Richard “Rick” Wagoner to step down when Wagoner’s plan for restructuring the company was rejected. Many insiders speculated Wagoner’s stepping down was conditional as part of the government’s stipulations to back the ailing auto giant, resulting in the taxpayer ownership and controlling position in the company. The change in leadership, in March of 2009 of Mr. Wagoner as CEO, appeared to be synchronized with President Obama’s announcement that GM had 60 days to restructure its agreements, giving rise to the rumors of White House exerted pressure.

With the restructuring plan in hand in July 2009, GM wasted little time in announcing that it would be shedding four of its brands as separate divisions, while leaving four brands in place as it moved forward. The four brands to remain as a foundation for the new GM’s future were Buick, Cadillac, Chevrolet, and GMC. Just a year after making that decision, in July 2010, GM reported the best sales month for the year with a jump of 25% in these four core brands, and an overall rise in sales of 5.4% in all of its offerings.

The once touted Saturn brand, once viewed as an important part of GM’s future, is to be shuttered down and phased out by 2012. The Pontiac division which has been part of the car business since 1932 might have some models survive in name, but will no longer survive as a separate division. The Hummer brand had already been up for sale since the fall of 2008, and had reported interest in its brand coming from several Chinese companies. As we now know, after the failed sale to the Chinese heavy equipment manufacturer, Sichuan Tengzhong, GM rolled out its last 2009 model Hummer in May of 2010, shutting down its operations of its production line in Shreveport, LA.

Saab, the Swedish automaker, was eventually sold by GM to Spyker Cars, a tiny Dutch maker of high-end sports cars on January 26th 2010. The new GM received $74 million in cash and $326 million in preferred shares as a result of the sale. GM’s investment in Saab leading to its ownership came in two transactions. In 1989, GM invested $600M to take a 50% ownership. With this, the process of establishing fresh-start-accounting for the new company, an important step towards making the “new” GM available for this IPO application, was completed. GM recorded a net income/(loss) of $(4.3) billion for July 10th – December 31st, 2009, which included a one-time settlement loss of $(2.6) billion related to the UAW retiree medical plan, and $(1.3) billion foreign currency re-measurement loss. In a statement at the time, prophetic in its content, we received this,

“As the results of 2009 show there is still significant work to be done. However, I continue to believe we have a chance of achieving profitability in 2010. We are also dedicated to delivering on our commitments to our stakeholders.”

– Chris Liddell, GM Vice Chairman and CFO

As had been previously reported, GM announced its Q2 results for 2010 on August 12th. The company was profitable for the second straight quarter, reporting net income from operations of $1.6 billion, up from $1.2 billion in the first quarter. Its net income for the second quarter was $1.3 billion, up from its $865 million reported in the first quarter of 2010. In two consecutive quarters for the first half of 2010, GM managed to report over $2.8 billion in operating income and $2.165 M in net income. With theses reported results we got this,

“I am pleased with our progress on achieving our business objectives. We have delivered strong product, maintained cost discipline, progressed strategic initiatives, such as restructuring Europe and are acquiring (subprime lender) AmeriCredit, and delivered two consecutive quarters of profitability and positive cash flow.”

– Chris Liddell, GM Vice Chairman and CFO

With all of the good financial news, and expectation of the IPO document filing being announced, investors and analysts instead got another leadership change announcement. This time it was Ed Whitacre, as Chairman and CEO, who was stepping down as of September 1st from the CEO position, and Chairman after the first of the new year in January 2011.

It would appear that part of the restructuring plan for GM leadership is that with each milestone that the company achieves another leader steps forward to take the company to the next level. Fritz Henderson stepped down in December 2009 after taking the company through bankruptcy restructuring, implementation of the restructuring plan, and then in completing the fresh-start-accounting phase through the end of 2009. Just as Henderson was the new face of GM following Rick Wagoner’s exit, which marked the end of the “old” GM, Ed Whitacre joined Henderson and took over to get the company through these difficult, but progressive times for the “new” GM. With the announcement of the IPO, Whitacre now passes the “leadership torch” to Daniel Akerson to become the next CEO of GM. Akerson is a current board of director, appointed by the Obama administration to oversee and safeguard the taxpayers investment in GM. He was also the Managing Director of The Carlyle Group for the past seven years, spearheading some of the private equity firm’s biggest deals. Although he has no direct manufacturing experience in the auto industry, he brings a unique set of skils as the U.S. Treasury seeks to unwind its ownership over the coming months and years.

With the estimated IPO offering which GM has just announced being estimated to be between $10 and $15 billion of the taxpayers interest being sold, it makes sense to  have someone in the leadership role at GM who has experience in financial markets. The IPO is schedule to be executed by the end of 2010. We will be following all of the important events leading up to that offering right here at Market Playground.

Position: None

Contact the Author: denniscosta@Marketplayground.com