Monday, 28 September 2009

Company Focus – New GM – IPO Ambitions

Above and beyond the almost audible 'electric' buzz of Frankfurt - and its plethora of new-tech concepts - car-makers are having to face the present-day harsh commercial realities. Returned market-demand constraint after the retraction of government aid packages, major sector over-capacity and cut-to-the-bone new investment pressures that necessarily extend the life of present products mean that the industry is still in the throws of painful transformation.

For GM, the $50 billion 'bail-out' has provided at vast cost the time to re-evaluate and re-structure the corporation as 2 entities – old and new; with the ambition that certain divested US brands (Saturn, Hummer)(possibly Pontiac) and a 'de-commissioned' European division will reduce commercial drag as HQ centres on primary US, Chinese, Russian and Mercosur operations. Splittng the company into 'Good' and 'Bad' entities, the latter known as Motors Liquidation Co (ticker:MTLQQ), was an overdue requirement that has provided the base and critically perception of progress. The recent addition of Ron Bloom acting as Senior Council for Manufacturing Policy working in conjunction with Ed Whitacre and members of the new Board has undoubtedly shaken the very, previously complacent, foundations of GM. These appointments will be undertaking internal & external reviews so as to build a path forward.

The goal is an Initial Public Offering (IPO) of the New GM, an act that theoretically demonstrates the Board's and critically the Market's confidence in a new leaner, greener corporation that can equal not only its cross-town peer Ford, but critically Toyota, Honda, Nissan, Hyundai-Kia and VW – both at home and across the globe.

The IPO process is conventionally the chosen fund-accessing route after of years of company expansion, proven in its stability and capability, and in need of the typically far larger growth funds only available from public capital markets. However, whilst this is the historical norm, the IPO process has periodically been used to 'super-charge' the growth of a less-formed, supposedly 'under-scaled' (less proven?) operation; venture and growth financial backers keen to market the potential of the business model and so the company's ultimate market impact. Such actions were rife in IT & media with the dotcom boom and the ever-present promise from social-networking sites.

As a useful counter-point with New GM relevance, perhaps a good example of physical-online based commercial model today is the UK's online-grocery delivery company Ocado. It combines the customer access scale efficiencies of the web with a conventional delivery asset-base; thus more representative of a 21st century retailer with intrinsic value-chain connection. (In fact, because it is not in manufacturing with no production responsibility it is even more prescient to ultimate GM ambition surely!) Since establishing in 2002 this entity took much initial start-up and incubation funding to service: the offices, C2B & B2B communications infrastructure, depots and of course delivery trucks, and has only recently broken even. The 2006 backing of Goldman Sachs and certain high-level appointments led to speculation that the company would seek a 'quick-path' IPO; an action publicly announed in market frenzy of July 2009.

Thus, as we see IPO's can ultimately be typically a matured 'last-call' exercise for what are/were previously typically long privately held concerns, or as we've witnessed in the last 15 years more and more, a method to mature an under-scaled organisation. The latter's sale to both provide rich rewards for initial big-backers and providing a stable long-term growth and dividend model for long-hold investors such as institutionals, risk-averse individuals, as well as the possibility for sector peers/competitors to take stakes with the idea of latter-day M&A.

With its remit to repay the US tax-payer New GM was always going to seek its return to grace, and on-going viability, via the public capital markets; it is realistically the only plausible option open to it. Probably done so in a stepped or phased IPO manner, as befits the historical experiences of most privatised state-owned enterprises.

However, unlike the typical national utility (eg energy, telecoms or railway) company, with little or no competition, New GM must present itself to market with perhaps the most sophisticated 'shop-window-dressing' demands ever seen. The question is how exactly to take what was/is a 'smoke-stack' company and demonstrate it to be industrially and socially relevant and so of interest.

To do this New GM is re-moulding itself under the comprehensive multi-directional expertise of Whitacre (ex AT&T), Krebs (ex Burlington Northern Sante Fe), Isdell (ex Coca Cola), Marinello (Ceridian Corp), Russo (ex Alcatel-Lucent), Kresa (ex Northrup Grumman), Girsky (ex MorganStanley & GM), Bonderman (TPG), Akerson (Carlyle Group), Laskawy (ex E&Y) and Stephenson & Davis (Academia – Onterio & Georgia respectively)

Thus, beyond the continuing progressive external theme of socially responsible green(er)-vehicles,it seems that the internal theme is that the very foundation-stones are being put in place to possibly – ideally – transform the very being of New GM, its products and its operations.

The broad scope of Board member backgrounds demonstrate that GM has been forced – no doubt by its bankers and the government – to adopt fast and wide-reach cross-sector learning that moulds its future. Importantly for probable future 'parallel re-plays' regards both an efficiently managed IPO procedure and simultaneously the cherry-picking & adoption of the best 'operational enablers' from other sectors and companies. This wide-spectrum of influential members gives the New GM a new philosophical platform with broad strategic & operational reach by which to re-configure itself; thereby bringing-in the 2 main relevant features capital market seek: credibility and potential.

In short, credibility from 'old-hands' of the IPO process with good Wall Street connections, along with a master-plan of how to continually re-organise the company; the main element of which appears to be the out-sourcing of many 'non-core' activities to achieve a far more flexible, market reactive, and critically less capex intensive business structure. Also, investment-auto-motives suspects that, like FIAT-Chrysler, New GM will have used its Chinese partnership(s) learning with Shanghai Motor and Wuling Motor to evolve both culturally and legally a form a new corporate mentality toward alliances both inside and external to the auto-sector.

[NB SAIC, GM's partner in China, has reportedly agreed to inject an initial $147 million as part of the stock take-up, implicitly demonstrating to Chinese state, institutional and private investors its confidence in the re-formed US operations. This it is hoped by the Obama administration will assist the re-balancing of of the burdensome debtor-creditor relationship at the international budget level].

This is the good news, but equally there is need for great caution.

Whilst the General's broad-brush plan appears in place, the details appear quite sketchy at present, and the ultimate execution even more opaque.

New GM looks to be highlighting its new and improved features on its corporate windshield, no doubt well-versed at mimicking showroom floor advertising. As with the previous Ocado on-line grocery delivery business, New GM has endeavoured to utilise the re-ignited appeal of Web2.0 to add gravitas to its marketing strategy and customer reach. Its retail partnership with e-bay ( has had heavy press coverage and creates another on-line portal to its products, but any insightful analyst will recognise that the auction type purchasing model has lost its lustre in recent times as more and more complex variants have appeared for big-ticket items that have been seen to be overtly (legally) orchestrated in the seller's favour.

(This is not to say that the e-bay venture is prematurely doomed, simply that it will need to build-up credibility and belief given the opportunity for abuse that could emerge – one area being virtual inter-dealer competition creating value destruction, or the opposite with regional cartel-like arrangements. Simply to say the system needs careful managing and oversight from inside GM itself to become an important retailing channel).

Hence this is just one aspect of the full new and complex business equation that must be settled in both its operation and level income-stream contribution before Wall St and global financial analysts - on both sell and buy sides – can start to truly believe GM's new enterprise value price, as touted by the elected book-runners. The usual metrics will be furnished (ie price-earnings , price to book and price to assets) will of course be abound, but such measures will need more than rhetoric and hearsay and potentially over-valued intangibles/goodwill to enthuse what are still rightly very cautious investors.

Thus, investment-auto-motives believes that although there may be political pressure to undertake the IPO as soon as practically possible, the reported time-scale of Q1 2010 could prove to be far too early, especially if the US's real (not technical) economy stagnates or again falters over year-end and the Christmas period.

Remember, it was only July when GM went into Chapter 11, and although rapidly processed, a 6-7 month gestation period seems a very short time to fully-form an enterprise that must not only impress Wall St come IPO time, but also maintain traction thereafter if it is to build global investor confidence.

Yet again the maxim proves true...”what is good for GM is good for America”, but great care must be taken to ensure New GM is indeed fighting fit when it enters the financial and market arenas. Given the stakes for both GM and the US economy, any doubt should delay the IPO. For it is not just New GM's reputation, but America's as well.