Largest Ever – Is GM’s IPO Political or Practical?
Aug. 19, 2010
A leading expert on initial public offerings, Francis Gaskins, is not wowed by General Motors’ IPO – to say the least. That’s despite GM being profitable in the first two quarters of 2010. Its Q2 sales of $33.2 billion led to a $1.3 billion profit.
In filing the IPO, the company is anxious to return to Wall Street by shedding its nickname, “Government Motors.” The manufacturer’s demise resulted in an unpopular bailout and the second-largest industrial bankruptcy in history.
GM’s bid to return to the New York Stock Exchange followed a 700-page document filing at the U.S. Securities and Exchange Commission. GM plans to use the ticker symbol “GM.” It also hopes for a listing on the Toronto Stock Exchange. But the ticker symbol hasn’t been determined.
To fully pay back taxpayers and all stakeholders, GM’s IPO would probably have to raise$70 billion. The government has a 60.8 percent stake in GM after giving the company $50 billion in 2009. The United Auto Workers Union has a 17.5 percent ownership. But $2.1 billion in preferred stock is owned by the government and will not be included in the IPO.
Widely respected for his views, Mr. Gaskins gives the IPO a thumbs-down. He publishes IPOdesktop.com, which is called “Forbes Best IPO Site.” His Twitter account: www.twitter.com/ipodesktop.
His succinct tweet: “No rational reason to value GM’s IPO more than Ford. Implies big loss to taxpayers.”
Far from being a mere harsh critic, Mr. Gaskins is scholarly, one of the nicest people I know, and is even artistic as a violinist — except he doesn’t fiddle around in an IPO analysis.
The Wall Street Journal reports 10 investment banks will implement the IPO – historically, the largest group of financial institutions ever in a U.S. IPO.
The newspaper reports the banks include: Morgan Stanley, J.P. Morgan Chase, Bank of America Merrill Lynch, Citigroup, Goldman Sachs Groups, Barclays Capital, Credit Suisse Group, Deutsche Bank, RBC Capital Markets and UBS.
Each is reportedly providing as much as $500 million in credit.
My recollection is that GM got into trouble following its weak sales, high material costs, and too-high union wages and pension costs. Many taxpayers and pundits criticized the government’s bailout of GM by calling it an administration payback to union supporters without enough consideration for taxpayers.
Now, questions abound over GM management’s expertise and financial reporting, which are among the reasons Mr. Gaskins isn’t confident about the IPO.
“They don’t know what’s happening,” he says.
What about the IPO’s timing? My sense is it appears the government is pushing the deal in advance of the Nov. election so politicians can escape more criticism of the unpopular bailout.
If asked, Mr. Gaskins says he’d tell the government: “I would say don’t do the IPO.”
Translation: If you are an investor, read the 500+ page IPO prospectus and do your due diligence. This IPO appears more political than practical.
P.S. The irony is that GM is now producing some outstanding vehicles, especially Buick. The legendary model’s sales are up 137 percent.
From the Coach’s Corner, to see Mr. Gaskins’ astute analysis on Bloomberg Television: http://bit.ly/dd1LE4.
Disclosures:
- Mr. Gaskins and I are fellow members of Consultants West, www.consultantswest.com, an association of veteran consultants.
- My firm has had multiple GM dealers as valued clients, and has benefited financially by recommendations from GM sales management.
Will Goldman’s Scandal Prompt Cultural Changes on Wall Street?
Updated July 15, 2010 – 3 p.m.
On the same day Congress passed sweeping financial-reform legislation, Goldman Sachs & Co. agreed to pay $550 million to settle fraud charges. The charges accused Goldman of fraud in mortgage investments. That includes $300 million in fines assessed by the Security and Exchange Commission – the largest in SEC history.
The remaining balance of $250 million goes to the victims.
You might recall that Goldman’s mortgage-related investments were designed with participation by a Goldman client, Paulson & Co. Paulson bet those investments would not succeed, and they didn’t.
Goldman is now forced to assess its procedures in such financial mortgage deals. The catalyst was the investments that cost investors nearly $1 billon, but the deal netted Paulson huge sums of money. It was also part of the mega mortgage meltdown that helped to exacerbate the nation’s economic downturn.
“This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing,” said Robert Khuzami, the SEC’s enforcement director.
A federal judge in New York will rule on the settlement.
The case against Goldman gathered steam when a published report added impetus to fraud allegations against Goldman. The Sacramento Bee alleged Goldman secretly worked to dump “billions of dollars in risky mortgage securities and buy exotic insurance” in anticipation of the housing bubble. But the report said Goldman hid its actions from the Securities and Exchange Commission for nine months in 2007 (“Goldman didn’t disclose its subprime mortgage hedges”).
At issue: Opponents eventually proved that Goldman’s gambling was so relevant – investors would not have bought Goldman’s offerings.
The furor over that controversial 2007 mortgage derivatives deal underscores the fear of many Americans that the market is rigged against them because Wall Street is a haven for questionable behavior.
The Security and Exchange Commission’s triumph over Goldman’s handling of the collateralized debt obligation (CDO) in subprime mortgages shows the Wall Street sheriff is back and is flexing some muscles.
Furthermore, Goldman’s failure to disclose that a hedge fund manager, John Paulson, helped select the underlying securities and then bet against them to make more than $1 billion is bad enough.
It’s looked even worse after Bloomberg reported Goldman knew it was under investigation for nine months but failed to disclose the investigation in their financial reports to investors.
Such omissions triggered the shareholder legal action.
The resulting headlines are reminiscent of the financial-greed scandals involving the 1980’s shadowy behavior of convicts Mike Milken and Ivan Boesky, as well as the principals at Enron and Worldcom.
Several questions have arisen:
- Is the SEC action really the tip of the iceberg of upcoming legal challenges?
- Will it lead to a stock market correction?
- Will it end the entitlement attitudes seemingly held by many investment bankers?
- Will it improve the culture in the financial sector?
This case was an ideal situation for New York’s litigious community.
It led to a decline of Goldman shares – 13 percent – as well as the shares of other financial companies trading in CDOs, including Deutsche Bank AG, Morgan Stanley, Bank of America (the parent of Merrill Lynch) and Citigroup.
In addition, a Chicago online publication, ProPublica, reported on questionable bets by Magnetar and allegations of conflicts of interest by the latter three financial firms. Magnetar denied culpability and none of the three banks denied or commented on the allegations.
Indeed, the same day that the SEC acted against Goldman, April 16, a Dutch bank leveled similar charges against Merrill Lynch. Cooperatieve Centrale Raiffeisen-Boerenleenbank BA, or Rabobank, cited Merrill Lynch in a $1.5 billion CDO.
Sadly, regarding Wall Street’s entitlement attitudes and culture, the consequences might not be severe enough to prompt an attitude adjustment.
Not to be cynical, here’s the bottom-line question: Are there enough moral compasses on Wall Street to put a stop to the chicanery? Probably not.
From the Coach’s Corner, for more on Sen. Cantwell’s efforts, see “Sen. Cantwell Is Right to Question Risky Derivative Dangers, Geithner.”
Investor: Tips for Increasing Cash Flow, Profits
For a growing business, cash flow is crucial for profitability. That’s also true for the biggest companies and sectors traded on Wall Street – airlines, cars, financial services, oil or technology.
Every company is concerned about cash flow; but in 2008, 128 of the Fortune 500 companies in the nation had red ink. They include General Motors, Citigroup, Motorola, AIG, Merrill Lynch, ConocoPhillips, and Time Warner.
Cash flow enables you to make productive decisions to navigate and grow in the competitive marketplace.
No one knows that better than angel investor John B. Dimmer, the managing member in FIRS Management LLC, a private investment firm based in Tacoma, WA. He is also a director at three companies and has extensive management experience.
Here is a sample of his cash-flow solutions:
Q: How do you recommend predicting a cash-flow crunch in time to do something about it?
A: You need monthly income and expense forecasts that are established at the beginning of the business year. These must be realistic numbers that all of the management staff has agreed are reasonable. The second things you need are timely and accurate financial statements.
It is very much like planning a road trip in the car. You are trying to get from point A to point B, so you plot a route. You know that there are landmarks along the way. Every now and then you need to stop and check for these landmarks. If they show up where you expect them, you know you are on the right track. If not, you need to evaluate how far off course you are, and take corrective action.
Q: What strategic process do you recommend to evaluate the causes of cash deficits? What are the most promising solutions?
A: Getting back to our roadmap analogy, if you don’t see a landmark that should be there, or you find a new landmark that wasn’t on the original plan, you need a process for getting back on track. You need to take the time to evaluate where you are, where you should be, and what went wrong.
When you are off plan, there are some fundamental questions that need to be asked: Was the original plan flawed? Has there been a fundamental shift in the business such that the original plan is no longer applicable? Did we make an execution error? When, where, and what was it? Can it be corrected? What are the critical variables with respect to getting back on plan?
Usually this involves one primary variable, which is money. Whatever solution you take, you need to make sure you have enough money to fund it through implementation.
Q: How do you recommend finding creative ways to keep the business alive until sales pick up?
A: One of the mistakes I often see are entrepreneurs who staff their organizations under the assumption of optimum activity. The truth is that there are cycles to business. While not all business can use contract help, I like to try and have my companies staffed to a smoothed-average that is just above the troughs and just below the peaks. In this fashion, you can quickly and effectively reduce your labor costs in times of a slowdown without causing a morale-crisis with your permanent employees. I would also use slower times to beef up on training in preparation for when the good times return.
Finally, encourage your staff to make things happen. When we hit a slowdown in the car business, we ask our sales staff to get on the phone and start calling people. This usually starts with former customers and takes the form of a friendly call simply to inquire how everything is going with their car. Often times, you discover that they love their car, and they have a friend who is interested in buying a new car. Sometimes you find that they love their car and they want to buy another. And sometimes you find that there is a problem. Problems, however, create opportunities. If you invite them to come in, and then solve their problem, they will remember that you were proactive. They will tell their friends about their experience, and their friend will come and see you for their car needs.
Q: What about negotiating with investors or other financial supporters until cash flows increase?
A: Investors hate bad surprises, especially when the surprise is accompanied by an emergency need for funds. Assuming you created the roadmap, and are tracking your progress, you should be able to see the bump in the road well before you actually hit the bump. Most investors are business people who have been down the road before and know that everything is not smooth sailing. They will appreciate the fact that you have a plan, that you are tracking your results against the plan, and that you have foreseen a problem before it hits.
Generally cash flow problems mean you need to borrow more money or raise more equity. If such is the case, have your presentation for raising new money ready to go so that you can transition from the communication stage to the pitch. Be humble, because the last thing I really want to hear as an investor is how smart you are and how great everything is going when, in fact, you are off plan and running out of money.
Part of the negotiation is an acknowledgement of the problem, a rational analysis and a well-crafted solution. You, as the owner, may need to take a bit of a hit in order to implement a solution. This might come in the form of a down round of fundraising where you are force to make up the dilution to the other shareholders out of your own holdings. Know what you are and are not willing to do. If you are forced to give up something to keep the company alive, figure out how to get it back, perhaps via options, if your revised plan was the proper call and the company comes roaring back.
Q: How do you know when it’s time to close or sell the business?
A: I always want to stay in the game, even when it is two outs in the bottom of the ninth inning, you are down by five runs, and the count is full, there is still a chance you can pull off a win. Nonetheless, I try to keep entrepreneurs from getting in so deep that if their company fails, they are wiped out. I’ve been involved with two companies where I had to tell the entrepreneur that they shouldn’t put any more money into the operation.
In one of those instances, we were able to locate a buyer for the company. The purchaser was a publicly traded entity that, since the purchase, has taken a bit of a down-turn, so the jury is still out as to whether the entrepreneur will come out whole. Nonetheless, it was a better option than closing the doors. With the other company, we have what we feel is great technology; we just can’t seem to get a revenue stream developed. We are in the process of procuring a patent, and think that it will have good commercial value once the patent is issued. Accordingly, we have put the operational aspect of the company in suspense, and are pursuing acquisition opportunities. The biggest risk on this strategy is a failure to cut a deal followed by an impotent patent.
I never advocate simply closing the doors. If you are doing proper planning, you should see the problem coming down the road. There should always be something saleable about your company, even if it is less than a full recovery.
From the Coach’s Corner, Mr. Dimmer’s other tips:
- “How to Attract an Angel Investor” – www.bizcoachinfo.com/archives/1367
- “How Investor Has Fun in Business and Technology” – www.bizcoachinfo.com/archives/1272
