By Steven Mufson
Seventeen months after veering into bankruptcy, General Motors has become the unlikely darling of Wall Street, poised to complete an initial public offering Thursday that will fetch more than $20 billion and rank as one of the largest in history.
Stripped of laggard brands, costly health-care benefits and bulging debt, the shiny new GM has attracted investors that range from former employees to Chinese auto giant SAIC to big pension funds that only recently lost money on the old GM.
The GM offering has become a referendum not only on the company but also on the economy. Despite jitters over the past week about the Federal Reserve's monetary policy, Ireland's debt crisis and weak demand for goods, many investors said they are confident that American car sales will continue to pick up and that GM will benefit. As GM's onetime chief executive said in the 1950s, "what was good for General Motors was good for the country - and vice versa."
"For an IPO of this size and complexity to be so successful, it means investors are broadly confident about the restructuring of GM, the state of the auto industry and to some extent about the state of the economy," said Steven Rattner, who led the Obama administration's effort to overhaul the auto industry. "People do not buy shares in recently bankrupt auto companies unless they are confident about the future."
Faced with broad enthusiasm, GM this week boosted its offering price and size beyond initial expectations. The carmaker said Wednesday that it priced its shares of common stock at $33 each, raising $15.8 billion. Including preferred shares, the company has raised at least $20.1 billion. If, as expected, the offering's underwriters exercise an option to buy additional shares themselves at the offering price, the total could reach $23 billion. That would be a sign of optimism about GM's first day of trading.
The federal government seized the opportunity to recoup part of the bailout money it injected into the company in the spring of 2009. The Treasury agreed to sell at least $11.8 billion worth of stock, lowering its 61 percent stake in what has been disparagingly dubbed "Government Motors" to just under 37 percent, a senior administration official said. If underwriters take their over allotments, the Treasury will earn $13.6 billion and its stake will shrink to 33.3 percent.
The sale of the government's shares is a highly political decision. Some critics think the government erred by nationalizing the company, while others say taxpayers might have been better served if the government had sold off its stake more gradually. A senior administration official said the Treasury has agreed to "lock up" its remaining shares and not sell them for at least six months.
GM's union leaders have also agreed to sell shares in the offering, cashing in on stock that was given to their pension plans under last year's restructuring accord.
"The fact that we could have this gigantic IPO from GM now demonstrates how much things have improved in the financial markets since . . . the dark days of a couple of years ago," said Edward Yardeni, a leading investment strategist and the president of Yardeni Research.
The only U.S. initial offering to rival this one's size was Visa's $19 billion offering in March 2008. Earlier this year, the Agricultural Bank of China raised $22.1 billion and American International Assurance Group in Hong Kong raised $20.5 billion in initial public offerings.
Amid the enthusiasm, some auto industry experts expressed concern.
Maryann N. Keller, an independent auto industry analyst, said the success of GM's offering was built "on the backs of" American taxpayers and the creditors who lost money in the bankruptcy settlement. She added that "there is no proof at this point that GM can function as a more nimble auto company."
She also warned that if the company began to make large profits, the United Auto Workers union would seek to "claw back" some concessions it has made.
Said Marina Whitman, formerly GM's chief economist and now a professor at the University of Michigan: "It really is kind of like taking a chance on a start-up, because in some ways GM is a start-up." She added: "It has totally new management, a largely new board of directors, and, if you leave aside the very top people, it's a new generation."
Whether those factors will produce better cars that people want to buy is another question. The company's ballyhooed Chevrolet Volt may be too expensive to woo many customers. The bigger-selling brands are still fighting to overcome the carmaker's tarnished reputation.
"GM was able to coast on its reputation for a long time, then it plunged back to the cellar," Whitman said. "And it's going to take time to build it back up. Reputation lags reality on the way down and the way up."
Even without a dramatic change in its products, supporters argue, the new GM is a better investment because of its improved financial structure. "Having a better balance sheet is an important part of being a better company," Rattner said.
When the Obama administration orchestrated GM's bankruptcy restructuring, it said its goal was to streamline the company so that it could make money if U.S. car sales settled to about 10 million to 11 million annually, about two-thirds of peak levels.
A lightened debt load, lower wages and cheaper benefits helped GM make money this year, when cars were selling at a rate of about 12 million vehicles annually.
Many investors think the car market will grow further. Rattner said that to replace aging vehicles and accommodate the growing number of drivers, the industry will have to sell 15 million cars a year.
Said Yardeni: "I think we can get up over 15 million in a year or two." He added: "There is a lot of pent-up demand because people did hunker down and drive their cars a bit longer. But consumers still have the will to drive a new car."
For the administration, the offering provides a way to recover another chunk of the money that was spent to rescue GM. Money used for emergency funding plus reorganization totaled $49.5 billion (part of that provided by the George W. Bush administration).
Including money for preferred shares, GM had already repaid the Treasury $9.5 billion. At the offering price, the entire Treasury stake in GM would be worth $30 billion.
The administration's top economic officials, White House aide Lawrence H. Summers and Treasury Secretary Timothy F. Geithner, insisted at the time of the rescue that the government should sell its shares as soon as possible.
In the end, the Treasury's losses probably will amount to less than $10 billion.
Some critics say that money could have been better spent. Philip Levy, an economist at the American Enterprise Institute, said that although the bailout helped GM workers and suppliers, the money could have gone toward job retraining. He noted that if the company had gone under, Chrysler and Ford might have benefited. Moreover, he added, private capital might have come in to buy up GM scraps.
Other critics say that the GM reorganization gave unions too much money.
But others say it was a reasonable deal. The administration noted Wednesday that the U.S. auto industry has added 77,300 jobs since GM and Chrysler emerged from bankruptcy, that vehicle exports are up more than 40 percent from 2009, and that the nation's Big Three car companies posted operating profits for the first three quarters of this year.
"Certainly this is a very attractive valuation compared to what most of us expected a year and a half ago," Rattner said. "When the dust settles, Treasury will be modestly out of pocket on GM, but in terms of the disaster averted, I think it was a very cheap form of stimulus. It helped the economy when the economy appeared to be in total free fall."