General Motors is finding more demand for it's new stock offering this week, as well as for it's vehicles.
The automaker, which will issue its first public stock since it cleared bankruptcy in 2009, raised its asking price by 14 percent because of mounting interest in the automaker, which is currently majority-owned and controlled by the Federal government. Additionally, unexpected demand increased the number of shares GM will offer to 478 million, up about a third from what was planned.GM had priced its stock a few weeks ago at $29 a share. But as Ford and auto suppliers stocks have been on a tear for the last year, and analysts are becoming more bullish about auto sales in the next two years, interest in GM shares is climbing. And it is expected to be the biggest IPO ever.
"GM has proven they can make serious money at today's relatively depressed auto sales level, and investors are seeing that GM stands to make a lot of money when sales rebound to 15 million a year within the next few years," says Steven Rattner, former member of the White House task Force, which guided GM through its bankruptcy.
GM is 61 percent owned by the U.S. Treasury, with the remainder owned by the United Auto Workers Healthcare Trust, the Canadian Auto Workers and former GM bond holders. The automaker will sell 478 million shares at $32 to $33 each. GM is selling an additional $4 billion in preferred shares. Trading of GM shares begins Nov. 18.
In an ironic twist, the shares will hardly be available to the taxpayers who bailed out GM at the issuing price. GM and its investment bankers are doling them out to institutional investors, and even a Chinese automaker. But "Joe Taxpayer" won't be able to invest in GM until after some of the big institutional investors start selling them after they make a big profit in the expected early run-up on the price.
It was believed that the GM's IPO wouldn't put retail investors who footed the bill for the automaker's bailout at such a disadvantage to big institutions and foreign investors, but that won't be the case. A GM spokesman said that the company was still under restrictions about what it can say about the IPO, and couldn't offer an explanation about why, even after the number of shares were increased on Tuesday, individual investors were being shut out of the offering. This means they will also be denied the likely first and second day run up in share value. Those gains will be reaped by Wall Street, institutions and foreign investors. Brokerage houses that cater to the general public have been cut out of the deal, which is being channeled through big firms and managed by four banks that were also bailed out by the government during the financial crisis.
The banks managing the deal are JPMorgan Chase & Co., Morgan Stanley, Bank of America Corp., and Citigroup Inc., each of them recipients of billions of dollars from the $700 billion Troubled Asset Relief Program. E-Trade, Ameritrade, Charles Schwab and other brokers catering to smaller investors were cut out.
"In general, the hotter the IPO the harder it is to get an allocation of shares. We'd love to have gotten GM's IPO. We just don't have it,” said Ram Subramaniam, the head of products at TD Ameritrade.
Fidelity has an agreement with GM underwriter DeutscheBank to sell shares to retail investors. But to place an order with Fidelity, investors must have at least $500,000 in assets with Fidelity.
GM executives will also get an allocation of shares.
Spokespeople from the U.S. Treasury and Rep. John Dingell (D-MI) did not return phone calls to comment.
Despite the demand for GM shares, there is a thought in the marketplace that the automaker may be hitting the IPO market too soon, that it should spend more time getting its house in order. "Management is clearly out to shed the government ownership as quickly as it can, which it sees as necessary for both its image and its operations," says Rattner.
GM CEO Daniel Akerson told employees in September as he was taking over from Ed Whitacre Jr. that he was anxious to shed government ownership.
The IPO will help GM return some of the $49.5 billion GM received in the taxpayer bailout. The Treasury, which is taking a loss on its portion of the sale, will break even only if the shares climb at least 50 percent, data compiled by Bloomberg News show. At $33 each, the sale would give the Detroit-based automaker a market value of almost $65 billion, versus Ford Motor Co.'s $59 billion.
GM reported third-quarter net income of $2.16 billion last week, bringing its earnings this year to $4.77 billion. That tops the $4.46 billion profit by Toyota Motor Corp.
Akerson has said that earnings will be significantly lower in the fourth quarter and the first three quarters of 2011 because GM will be launching several new vehicles and making capital investments in future products. There is little doubt that GM has engineered its earnings cadence this year to peak right before its IPO.
But the outlook for the automaker is still positive. It has maintained its market share of around 18 percent despite shedding four brands last year and its newest products have been well received by the public. Also, GM's China business is healthy, and that country is the fastest growing market for new vehicles in the world.