GM’s IPO: Back to the Future
General Motors reaches a milestone this week as it presents an initial public offering. HBS faculty discuss issues facing the automaker's revival.
On a journey that began 17 months ago, General Motors entered and emerged from bankruptcy to become a private company with Uncle Sam as its largest shareholder. The company reaches another milestone today by offering an initial public offering, the first time GM shares have traded since it entered bankruptcy reorganization on June 1, 2009.
What are some of the key issues the company faces? Three Harvard Business School faculty members--Joseph Bower, an authority on general management; Vineet Kumar, a marketing expert; and Dante Roscini, who brings to the School decades of experience in investment banking--give their points of view.
Joseph Bower, Baker Foundation Professor
The GM IPO represents the beginning of the end of a remarkable piece of intervention by the Obama administration. The government's involvement in the US auto industry was dramatic in many respects. Beginning with the decision by the Bush White House to provide more than $20 billion to GM, Chrysler, and their financial subsidiaries, the auto task force put together by President Obama managed a restructuring of both companies at a breathtaking pace.
Whereas a normal bankruptcy might take many months, this process would take 30 days. Bush apparently concluded that GM would not fail during the remaining days of his watch, and Obama was not willing to see the US auto sector implode as a result of the bankruptcy of GM. Studies showed that the loss of GM would devastate the auto ecosystem, including parts suppliers, tertiary suppliers such as steel and aluminum manufacturers, the dealer network, and providers of financing, especially GMAC.
The task of saving two major auto makers was all the more difficult because the companies appeared peculiarly unprepared to deal with the massive problems they faced. Steve Rattner, who chaired the government task force, found the initial assessments of their needs woefully understated and badly documented, reflecting decades of lost market share and destroyed shareholder value.
The deal that was struck has been criticized as too generous to bondholders, unions, and management alike. Bondholders received something like 10-to-15 cents in new GM equity on the dollar when the debt had no market value. The unions received a larger share of the equity than some thought their due, but in return they accepted new GM equity as funding for 87.5 percent of their retirees' medical benefits. And the CEO, CFO, and many board members were shown the door. The concessions from all sides were remarkable, given that the powers of the task force were limited. Compared with the rescue of the financial institutions, the key parties all paid a heavy price.
Were this IPO taking place in the private sector, the owners would probably hold the stock until the company was in robust health. The realized price on the stock would then in all likelihood be higher. But the Obama administration has made it clear that as a political matter they want government involvement to be as short as possible.
The TARP money and the flexible terms on which it was legislated were critical to the rapid funding of administration decisions. The uniqueness of TARP, however, probably ensures that another intervention of this sort will not happen for a long time. Let's hope that General Motors and the US auto industry are on their way to recovery and that the IPO symbolizes the beginning of a new stage in the life of GM, whose sales figures have recently shown improvement.
Vineet Kumar, Assistant Professor of Business Administration
With this IPO, General Motors has a rare opportunity to alter significantly how people think about the company, its products, and the brand. US consumers have not had a high-quality perception of GM brands over the past few decades. Although driven in part by the company's missteps, the primary reason was significant increases in quality and reliability made by Japanese manufacturers during that time.
Now, however, the overall perceptions of key competitors have dramatically changed. Toyota, in particular, has a significantly diminished reputation due to highly publicized recent recalls. At the same time, Ford has been revitalized, other Japanese auto makers have made advances, and Korean manufacturers are focusing on improving their quality and innovating on warranties and assurance programs to remove consumer uncertainty. Much further down the road, competition will come from China and India.
What does this mean for GM? In the midst of the changing competitive landscape, consumers who may not have considered buying a GM vehicle over the past decade may now be inclined to do so again. What the company has done in rationalizing the number of brands in its portfolio has been a good start, but more needs to be done. I also expect potential US car buyers to have mixed feelings about the brand, given that it has received taxpayer support to survive during the financial crisis. On the international front, GM is less saddled with negative perceptions, especially in emerging markets. In the future, the company has the potential to leverage this source of demand to learn from these experiences and design and develop innovative products.
What should GM do? It must aim to achieve a clear transition with the IPO and not be satisfied with only incremental improvements. While consumers may be willing to give the company the benefit of the doubt as it progresses with the IPO, GM must not only follow through with products that deliver higher quality and reliability but also clearly communicate these advances to consumers, even If that means focusing on just a small subset of top products like the Chevy Malibu. GM's launch of the Chevy Volt, the first plug-in hybrid, has also demonstrated the potential for innovating, rather than just playing catch-up to everyone else. It is no coincidence that the IPO is positioned around the launch of the Volt to maximize awareness of the changing view of the brand.
Given this complex and challenging situation, I see this as a unique and potentially crucial inflection point for GM (another one may not come again for years). Executing on quality, innovation, and messaging can help the company maintain its position and even grow its market share. These crucial decisions will determine the future evolution of the auto industry.
Dante Roscini, Senior Lecturer of Business Administration
As is often the case with privatizations, the General Motors IPO will be one of the most significant events of the year in the equity capital markets.
Depending on the final price, at over $10 billion it will be the second- or third - largest US IPO ever and rank in the top ten largest global IPOs in history. Its size is even more remarkable, given the still fragile state of the equity markets. With stock sales in the US at a five-year low, raising this amount of funding is a delicate exercise that requires careful structuring of the transaction, cautious pricing of the shares, and wide diversification of the pockets of demand by the underwriters. These elements explain the concurrent convertible preferred stock offering, the discount to the trading multiple of Ford Motor Co., and the solicitation of interest from sovereign wealth funds alongside traditional buyers.
IPOs require a leap of faith from investors who have to bet on a new company. The new GM wants to be just that, a corporation intent on presenting itself to the market remolded as a streamlined, low-cost producer with a new corporate structure, a stronger balance sheet, a slimmed-down array of brands, a smaller dealer network, and a global presence to go with global ambitions.
A successful IPO will help reestablish GM's credibility as a viable private concern. For consumers, who need to know that the company will be around long after they have bought its products, the new listing will show GM's renewed ability to access the capital markets.
For the federal government, the reduction in its ownership below 50% will underscore its ability to execute without delay an exit strategy from the initial investment. More important, by establishing a liquid market in securities, the IPO will open the door to a progressive program for selling off the government's stake in the company. This is the only way for the Treasury to divest of its holding and will follow a path similar to the one adopted in many European and Asian privatizations in the 1980s and 1990s-a process that showed that large positions can be exited over time without diluting the value of the stock.
The bailout of the US auto industry has been a controversial subject from the outset. The issue of returns to the taxpayer is a particularly sensitive one. Based on the price range of the transaction, it is likely that the IPO will be done at a lower value per share than the average paid by the Treasury at the time of the bailout. But as with any investment, the rate of return should be judged only when it's fully known.
GM has a long road ahead of it. Among many other things, it must produce consistent financial results against a difficult economic and sector outlook so that its market capitalization can grow to ensure that taxpayers will eventually get their money back.
It's a difficult challenge with broad implications. Those looking for immediate results are in for a disappointment. It will be several years before we can say with certainty whether the bailout was a success or failure.