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Thursday, November 18, 2010

General Motors’ Initial Public Offering: Review of Issues and Implications for TARP

Bill Canis
Specialist in Industrial Organization and Business

Baird Webel
Specialist in Financial Economics

Gary Shorter
Specialist in Financial Economics

In the fourth quarter of 2010, General Motors Company (GM) is planning to issue an initial public offering (IPO) of stock to investors, seeking to become a publicly traded company and shed its image as “Government Motors.”

General Motors Corporation (Old GM) was a publicly traded company from 1916 until its bankruptcy in 2009. As part of restructuring, GM and Old GM combined received over $50 billion in federal assistance through the federal Troubled Asset Relief Program (TARP). In exchange for this financial support, most of Old GM’s assets were sold to General Motors Company, a new corporation owned by the U.S. Treasury (60.8%), the United Autoworkers (UAW) retiree health care trust fund (17.5%), the governments of Canada and Ontario (11.7%), and a group of bondholders (10%).

GM is not the only company that received TARP funds as a result of the severe September 2008 financial panic. More than 700 institutions received support, with the federal government taking ownership stakes in five large companies: GM, Chrysler, GMAC (now called Ally Financial), AIG, and Citigroup. The federal government stake in GM is unusual, however, in that GM is both not publicly traded and is majority-owned by the federal government. The Obama Administration and GM have both indicated interest in reducing or eliminating the federal stake in GM. In October 2009, GM and its owners agreed that the federal government would launch an IPO in July 2010, unless GM had already begun such a process.

The success of the GM IPO largely hinges on two major factors: GM’s internal restructuring changes and the performance and outlook of the U.S. economy, including U.S. retail auto sales. Since General Motors Company was created in 2009 with many of the assets of its predecessor company (General Motors Corporation), it has closed plants, cut its hourly and salaried workforce, shed three brands, reduced debt, introduced popular new vehicles, and implemented changes in retiree legacy costs that had been a major financial drain. In addition, the U.S. Treasury appointed new management at the company and new members to its board of directors. These management changes have arguably worked to reorient the GM corporate culture to be more responsive to the auto markets. Although GM acknowledged in a recent filing with the Securities and Exchange Commission (SEC) that more needs to be done, these benchmarks suggest to some that there will be a favorable response from potential shareholders.

For the first half of 2010, U.S. gross domestic product (GDP) was expanding, unemployment was very slowly dropping, and auto sales were rising from their 30-year low in 2009. In August 2010, however, the macroeconomic outlook became more uncertain. A number of economic indicators deteriorated: unemployment claims unexpectedly rose in mid-August, GDP growth estimates were revised down, and U.S. auto sales forecasts have been pared down. One relevant indicator of the overall health of the U.S. economy—sales of existing homes—hit a 15-year low in July 2010.

GM has filed the necessary registration paperwork with the SEC to issue an IPO, which is tentatively scheduled for November 18, 2010. This report discusses the IPO process, the factors that will affect its success, the size of the initial IPO, the IPO’s possible stock price, and the IPO’s impact on TARP.

Date of Report: November 10, 2010
Number of Pages: 30
Order Number: R41401
Price: $29.95

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