by Jason Simpkins
General Motors Co. (NYSE: GM) yesterday (Thursday) raised $20.1 billion in an initial public offering (IPO) that moves the company closer to paying back the taxpayer funds it received in a bailout last year.
However, GM's journey doesn't end there. Even after all of the IPO money changes hands, the company will still owe the federal government more than $26 billion. And the challenges that drove the company into bankruptcy to begin with – union payouts, tougher competition, and higher gas prices – are still relevant.
Ford Motor Co. (NYSE: F), Honda Motor Co. (NYSE: HMC), and Toyota Motor Co. (NYSE: TM) remain as well, having avoided bankruptcy all together.
Indeed, GM officials are excited to have reached such a significant milestone since filing for Chapter 11 bankruptcy protection on June 1, 2009, but they have to keep their eyes on the road ahead.
"We have to celebrate on the run here," GM North America President Mark Reuss told Reuters. "It's a big day to become a public company again but we have got to just hit the ball out of the park here every day on product."
GM's offering of $4.35 billion of preferred shares and an over-allotment option could boost the total amount raised to $23.1 billion – making it the largest IPO in history. However, GM stock would have to rise considerably for the company's stakeholders – which include the U.S. Treasury, United Auto Workers union (UAW), and Canadian government – to recover their investments in the company.
The IPO will return as much as $13.6 billion of the U.S. Treasury's $49.5 billion investment, slashing the government's stake in the company to 37% -- 33% with the over-allotment provision – from 61%. The option would increase the number of shares offered by the Treasury by 14.3 million.
The offering's underwriters – which include JPMorgan Chase & Co (NYSE: JPM), Morgan Stanley (NYSE: MS), Bank of America Corp. (NYSE: BAC), and Citigroup Inc. (NYSE: C) – have 30 days to exercise the over-allotment option.
The Treasury offered about 360 million shares in the IPO at a value of $33 a share. That means it will have to sell its remaining shares at an average of $53 to recoup its entire investment.
Still, at $33 a share, the IPO priced higher than initially expected and generated a significant amount of investor interest, paving the way for a government exit.
"General Motors' initial public offering marks a major milestone in the turnaround of not just an iconic company but the entire American auto industry," said U.S. President Barack Obama. "Through the IPO, the government will cut its stake in GM by nearly half, continuing our disciplined commitment to exit this investment while protecting the American taxpayer."
President George W. Bush first rescued GM with a $13.4 billion bailout, but it was the Obama administration that agreed to add another $36 billion as the company went through bankruptcy restructuring.
"President Obama believed in GM and invested in an American company with American workers," UAW President Bob King told The Detroit News. "There wouldn't be a General Motors today without President Obama's leadership."
The UAW healthcare trust fund holds 17.5% of GM and sold 102 million of its shares in the IPO and could offload another 2.7 million through the over-alottment option. The trust's stake in GM is set to drop to 14%, or 13% with the option, from 20%.
The Canadian federal and Ottawa and Ontario governments owned a combined 11.67% stake in GM when the company went into bankruptcy. That stake was reduced below 10% following the sale of 35 million shares through the offering.
Canadian Industry Minister Tony Clement and Finance Minister Jim Flaherty have said they're in no hurry to sell anymore shares at this time, since the stock may be worth more in future.
Additionally, Canadian Auto Workers (CAW) union president Ken Lewenza has encouraged the governments to keep some of their GM shares as leverage.
"The best choice for taxpayers and Canadian workers would be for government to retain a significant portion of its shares, to help ensure that the company maintains its Canadian manufacturing footprint and preserves Canadian jobs," Lewenza said in a statement.
Conversely, political pressure and a public backlash against big government in the United States have accelerated the U.S. government's exit from GM.
GM stock rose $1.19, or 3.61%, to close at $34.19 in its inaugural day of trading. The shares traded as high as $35.99.
Money Morning Contributing Writer Jack Barnes said in a special report on Thursday that investors should consider buying GM shares at a value under $35.
"The company that is being brought back to the market is better prepared to be an international manufacturing powerhouse than its pre-bankruptcy predecessor," said Barnes. "Will it be the largest or the best ever again? I don't believe so. However, that does not mean it won't be a successful equity investment for a patient investor."
Autoparts Manufacturers Catch a Tailwind
GM shares weren't the only equities that got taken for a ride Friday. Shares of GM's foreign competitors and auto supplies posted big gains as well.
Toyota stock rose 2%, Honda rose 3%, Audi rose 1.5%, and Volkswagen AG (OTCPK:VLKAF) surged 4.3%. Autoparts manufacturers also had a good day: Magna International Inc. (NYSE:MGA) jumped 1.43% and Tenneco Inc. (NYSE:TEN) topped 4%.
Still, analysts were wary of the rebound.
"I was more optimistic on auto parts companies in 2009. That was the time to get in," Morningstar analyst David Whiston, told CNNMoney. "Many companies were trading at absurdly low prices then. Now, they all look pretty expensive."
Brian Sponheimer, an analyst with Gabelli & Co., said it's unfair to lump all auto-suppliers together and that much of the stock gains in 2010 are based on fundamentals.
"What is happening this year is that suppliers, for the most part, were able to nimbly restructure their balance sheets and cut costs," Sponheimer told CNN. "As a result, many of the companies have reached a level of profitability that was impossible in 2008 when auto sales were slumping."
Auto production globally should rise significantly over the next few years thanks to a rebound in the United States and strong demand from emerging markets like China. Worldwide auto sales could increase from an estimated 68 million this year to as much as 86 million to 88 million by 2015, according to Sponheimer.
"There may be some speed bumps along the way but I have tremendous confidence in the auto parts suppliers," he said.
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