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Monday, December 20, 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

On November 18, 2010, General Motors Company (GM) conducted an initial public offering (IPO) of stock to investors, once again becoming a publicly traded company.

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, the United Autoworkers (UAW) retiree health care trust fund, the governments of Canada and Ontario, and a group of bondholders.

GM is not the only company that received TARP funds as a result of the September 2008 financial crisis. 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 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 on the desirability of launching an IPO by July 2010.

In the IPO, a portion of GM common shares was sold by its owners at a market price of $33 a share, raising $23.1 billion. The proceeds from this IPO largely went to the government and union trust owners, not to GM. The only capital GM raised itself through the IPO is from shares of preferred stock sold at the same time. The U.S. Treasury received $13.5 billion from its sale of shares, resulting in its ownership stake in GM falling from 60.8% to 33.3%. Among the other owners, the United Auto Workers’ retiree health care fund and the governments of Canada and Ontario also sold part of their shares, reducing their ownership. Additional shares may be sold in the future by those owners, including the U.S. government.

The continuing strength of GM’s stock price, and the related recoupment of government investments in the company, hinges on two major factors: the success of GM’s restructuring and the performance 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, 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. These changes are reflected in the successful IPO at a share price of $33. However, further strengthening of both external and internal conditions may be required for the shares to reach approximately $54, the level at which the U.S. government would be able to recoup the nominal value of its $50.2 billion investment in the company. 

Date of Report: December 8, 2010
Number of Pages: 26
Order Number: R41404
Price: $29.95

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