Company Focus – General Motors – How the NOMAD MEN will be Targeting Additional Buyers for the IPO Roadshow

Recent press releases at long last demonstrate that fact that the US Treasury must temper its ambitions regards the innate sale value of GM's first IPO tranch. Intended to raise between $10-20bn, recent murmurings highlight that the figure could be lower.

The standard below-par offer sits at between -5% to -8% the nominal face-value of a released stock, so as to try and ensure the 'early-bird' investors see a positive short-term gain. At extremes, there are reported views that GM's stock may have to be presented at up to -30% face-value.

Such an event would make a mockery of the floatation, and has set-off alarm bells for the UAW trustees and Canadian government, who would rather release their respective portions when improved market conditions assure recoup of original respective 'debt-swap' and 'bail-out' expenditures.

Thus the US Treasury would be the only seller, and itself caught between a rock and a hard place, between being seen to recapture a portion of the tax-payer funded $61bn GM package and the possibility of seeing proportionate value-destruction.

That $61bn sum of course does not include the additional costs actually incurred by the process of Chapter 11 administrative filing and expected fees in marketing and finalising the IPO. Some say that figure, added to the original $61bn, reaches near $70bn all told. The natural method for pricing is to compare with domestic sector competitors, with Ford really as the only comparable benchmark.

The debt-laden but operationally profitable Ford is worth approximately $40bn market capitalisation, hoping to combat recent and ongoing input cost and consumer demand headwinds by actually reducing its range (as seen with the retraction of the 'thinner margin' Ranger pick-up from the NA market).

[NB Chrysler is not referenced given its operational integration/protection by FIAT, and the inability to clearly assess a standalone enterprise, even if early official reports state it as being profitable].

Thus, this essentially direct comparison of two US multi-national automakers, set against the global sea of Eastern players - is the current bug-bear of the markets in identifying a fair value for GM.

GM's nominated advisors (its NomAds) will have scoured the global investment community to identity the most likely candidates for near assured sale: the FT reporting of 10 book-runners and under-writers. Although the usual suspects of large institutionals are the first port of call, other non-traditional may well have been approached given the limited level of risk-exposure all large investment bodies presently seek; with the underwriters themselves possibly re-insuring themselves against a possible 'hit' of unsold stock..

A general view indicates that with so many fund managers seeking a mix of western risk-free buys (typically in bonds and revolved defensive stocks) married to still buoyant EM stocks, in-house pressures to maintain stability and growth of their portfolios indicates that longer-shot buys will largely remain on the shelf. And presently, GM could be seen by some as such a long-shot.

In recognising the 'perspective dependent' volatility of GM's value, the interest of the shrunken but hard-fighting hedge-fund sector may take, could also be problematic. With the macro-global outlook stance increasingly tepid on the expectation of China's 'soft-landing' and still fragile US consumer confidence, undermined by underpar jobs data , the hedge-fund attitude may well be negative. Those bigger players with market-fire-power could well seeking to short the stock, so positioning themselves for a latter 'buy-in' after what could be a number of rolled-over shorts, and so marked stock price decline.

Hence, with the risk-averse major institutionals weary (perhaps only taking the smallest floatation slice for political reasons) and hedge-funds possibly predatory, the NomAds will probably be targeting other buyer types:

1. Global Sovereign Wealth Funds
2. 'Bailed-Out' US Institutionals
3. US Governmental Pension Scheme Agency Funds
4. US Municipal Investment Funds
5. Foreign Auto Companies (ie Chinese & S.Korean)
6. Private Equity

Given their intrinsically long-time horizons and roles as facilitators of international diplomacy, sovereign wealth funds have a major part to play as IPO facilitators. The US could feasibly use its separate Treasury interests in GM to 'borrow from Peter to pay Paul' but such a ploy – even if indeed tenable - would obvious only serve to send the message out to the broader market that the GM entity was essentially a dubious running concern, and create a 'field-day' for political and financial journalists. Instead the far more buoyant pots of Asian, Middle Eastern and South American SWFs are undoubtedly seen as the prime candidates for taking long positions on GM, with the ability to stand any minor early period stock shocks that could come about. Equally, although well entrenched operationally within EM regions, GM is still seen as a local industrial and economic facilitator, part of the 'driving mechanism' to advance infrastructure and standards of living. Hence, these are seen by investment-auto-motives as the prime candidates from the NomAd viewpoint.

Whilst the more secure, risk-averse private and publicly held institutionals in pensions and insurance realms may baulk at the GM offering, certain enterprises – namely those themselves bailed-out by the US government during the financial crisis – may be expected to participate as buyers, even if not 'corner-stone buyers'. The most obvious is AIG, into which the US Treasury pumped a reported $182bn to stem its losses and restructure the company. The US Treasury is about to transfer its holding of preferred stock worth $49.1bn to 1.66bn common stock shares to itself recoup its 'public good investment'. But whilst AIG is naturally seeking to divest of non-core assets – including an auto-insurance company, there could well be quiet whispers from Washington that seek it to take-up a stake in GM; especially so since it is the only insurer not to have repaid its TARP monies (Hartford and Lincoln having done so). Not quite a case of borrowing from Peter to pay Paul, but in reality not too far off.

The third candidate is the varied group of Pension Funds run at Federal and State levels that seek to secure the retirement futures of government employees. Separated from Municipal bodies to avoid conflicts of interest regards a state's balance sheet, they have acted much as mini-SWFs, with a vested interest in 'hard'/'soft' national infrastructure aswell as down-the-line earnings to satiate the increasing demand-level from retirees. These economically aligned funds are obvious participants in the GM offering. Under the 1932 inaugurated State Employees Retirement System ('SERS' latterly 'PERS'). 'CALPERS' is perhaps the best known, today representing the retirement interests of California's public workers, and seen to be the most activist. Whilst the one of the largest funds there may take some convincing of the patriotic good in backing GM, since beyond its own activism toward GM in 1992 regard corporate governance, California has historically been the home of various auto-companies design, R&D and divisional HQs, but much of GM's activity (besides retail) takes place outside of CA: in Michigan, the mid-west, and now southern states. Also California's recent 'sponsorship' of alternative energy vehicles including companies such as Tesla Motor could lead to Board-level conflict when pursuing the national and state agendas. (Any vested interests by board members or influential state persons should be identified). However, given the importance of the GM IPO to the US, such frictions would be expected to be overcome, ideally without word from Washington, and as part of the balanced stock-price identification mechanism.

Municipal Investment Funds and State Investment Funds have obviously been set-up for the good of the region, state and so in turn the nation*. Wisely separated from Governor access, like PERS, these regional funds have the similar remit to act as mini-SWFs, with dual goals of providing both additional short-term operating cashflow (thereby assisting beyond immediate tax revenues and budget spend) aswell as longer-term capital cushion buoyancy. Given the poor state of many State finances, these investment funds have gained greater visibility in recent years, both in terms of risk exposure – given the CDO debacle – and general governance.
[*This remit stands in stark contrast to the massive over-leveraging of the PSBR many US states have undertaken. Whilst historically conservative states like Nebraska, Texas and Virginia have constrained spending and so debt, other like California and Michigan weigh-down the nation. leaving their own credit standing - and possibly that of the whole US nation's - as near perilous, with ramifications for the dollar – something China undoubtedly sees with resistance to its own Rm rise; an issue GM itself must address given the repatriation effect of Rm:$].
However, Municipal and State-level investment funds have a major role to play determining the success of the GM floatation, yet whilst acting as floatation catalysts will also recognise the onus on themselves as foundations of regional balance sheet wealth creation, thus have an impetus not to overpay, so again actors in the stock-price determination mechanism. Interesting to watch will be the actions of intermediaries such as the New Jersey State Investment Council, the likes of which may have to pursue (simplistically) split investment attitudes between homeland offerings such as GM and more international opportunities via PE firms such as TPG on its roster.

Foreign automotive companies are also an obvious possibility, seeing the opportunity to gain a new or greater foot-hold in North America via (symbolic or otherwise) ownership of GM stock. Such a move would also provide a basis for technical co-operation and expansion between GM and other interested VMs. To this end, two Asian countries hold the greatest appeal: China and S.Korea.
Along with Chrysler, GM was one of the first 'foreign enablers' for China in the early 1980s, its initial arms-length co-operation evolving into the biggest JV entity via GM-SAIC (Shanghai-GM offering Cadillac, Buick & Chevrolet), with more recent stake in Wuling mini-vans to broaden its own product coverage and critically ingratiate itself with an important economy-driving segment. Thus continues to play a major role in US-Sino relations; even if the HUMMER deal was canceled.
After 3 decades of such focus, given the changing economic/financial world order, it seems only natural that the PRC itself seek to put a portion of its massive foreign reserve dollar holdings to work, thereby gaining greater corporate, technical and political co-operative standing with the US, and simultaneously reducing the dollar's strength via FX flows which in turn provides a short term buying opportunity in US$ based assets (and equally $ pegged assets) aswell as the impetus to reduce its own internal cost base for later resumption of higher-value exported goods and services.
Thus just as the US has bought into China, so we seem to have come to the point where China buys into the US.
A second possibility is one, two or even three S.Korea auto-companies: namely Hyundai-Kia, Samsung and Ssangyong. Hyundai is of course well known in the US with its own manufacturing plants, but its CEO's public ambition is to grow massively to become ultimately the No3 maker. Assisting this effort, Hyundai procured a brokerage house some time ago to (although not explicitly stated) serve its own periodic buy-back ambitions, assist its own equity financing methods, and provide less conspicuous buy into other domestic and foreign companies through-out the automotive value chain. Thus with such ambitions, the piggy-backing of GM – through its IPO - could be a strategic option.
Samsung is the lesser known player outside of S.Korea, and sits as a sub-division of Renault-Nissan. Carlos Ghosn recognises the need to expand R-N's coverage of the USA and Canada, given that Nissan is the sole representative and could do with an underling to fend-off Hyundai-Kia et al. Given Samsung's export entry into South America has proceeded seemingly slowly but well, the notion could well be to position Samsung as the American Dacia, serving both South, Central and North America with affordable vehicles. This would counter its homeland position as near-premium, but allows for R-N's global expansion. Thus Samsung could through a third party take a small slice of the IPO offering to secure its place, in time growing its holding to become a latter-day operational associate with GM.
Ssangyong, the previous purveyor of exported SUVs with Daimler engines, has had injections of Chinese funds via SAIC's partial ownership, and access to low-cost components so as to maintain an element of modernity about the products and the company. Although notionally S.Korean,it could feasibly serve as China's entry vehicle into world markets as SAIC grows its ownership of the firm which at least has brand recognition in RoW markets, even if perhaps not an illustrious image.

Private Equity is the last candidate, though perhaps for less than obvious reasons. With the slowed economic era, the returns that shareholder activism was generating have also diminished. However, this era is witnessing PE taking on less of a 'conflict role' and more of a 'assistive role'. The replacement of Ed Whitacre with the appointment of Daniel Akerson as CEO, demonstrates Washington's, Whitacre's and the GM's Board's sensitivity to the requirements of the private equity sector. (Akerson well established in that field as a Director of Carlyle Group was appointed to the GM Board by the Autos Task Force in 2009). As mentioned in a previous web-log post at the time of the Akerson appointment, GM still has much to do to divest of its sizable asset-base, from the tangible defunct property and plant, the core of standalone divisional operations, to the less tangible goodwill value of dormant brands. Akerson will know how the PE sector operates, and it will be his remit to enthuse PE companies to take up the GM stock offering as part of their own long-horizon plays, so as to to gain favour in purchasing any of the divested assets GM must shed. Here, his task is to seek-out PE relationships which provide a good balance between long-term mutual wealth generation through GM operations probably working with a PE company's own portfolio, and the more immediate arbitrage opportunity the PE sector can earn from purchasing and latterly selling tangible and goodwill assets.

Thus all said and done, the GM IPO will not be an easy marketing exercise for the NomAds themselves, having to pitch to a myriad of investor types, many of which are not the usual candidates, and with recognition that Washington has a close eye on the process so as to try and ensure it recaptures a proportionate value of its bail-out spend.

Even with hard-ball negotiations between the book-runners and buy-siders, that looks increasingly unlikely given the present global macro climate, and the fact that any buyer – patriotic or not – must be seen to be operating an up-trend portfolio.

Those buyers will use prime evidence such as GM's September's NA market share slippage (to 18%) in their negotiations, and whilst not a perfect outcome, the more realistic the IPO pricing, the better for all to conclude in a successful take-up. Infact, this is an instance where all parties - the buyers, the book-runners and the under-writers – have a real role to play as economic actors that underpin the fragile US economy.

Company Focus – GM – Investor Road-Show Prospecting with a Necessarily Low Key “Yippee IPO”

The North American operations of the new General Motors Company has experienced a remarkable ride over the last 12 months or so. Its $60bn+ financial life-line and a politically generated 'fast-track' Chapter 11 restructuring designed to provide it with a lease of new life; so as to play its part in the economic regeneration of the US, and end the domestic value-destruction drag within the company's global empire.

Undoubtedly a radically re-shaped entity. It saw 8 brands slashed to 4: banishing non-performing divisional marques and those out of kilter with prevailing social trends. It saw an essentially cannibalistic dealer-base much contracted*: re-setting showroom catchment areas and enabling pricing power. It saw product specification rationalisation: the resurgent days of “more combinations than stars in the universe” gone. It saw the number of preferred supplier numbers shrunken: to offer contract security in return for discounts driven by economies of scale. It saw product engineering rationalisation: as new vehicle programmes were determined 'global' instead of 'local'. It saw the UAW recognise the scale of the challenge, necessarily altering its historic left-ward stance to rightwards: the reality of the enormous GMNA challenge and government persuasion showing its need to be part of the solution, not the problem. It saw major national support: from the large Energy Department loans from the out-going Bush administration, to the unprecedented Quantitative Easing measures from President Obama, which not only provided the 'bail-out' monies but doubly support the company (and the sector) with”Cash for Clunkers”

[*NB allegations flying back and forth within public web forums that the dealer rationalisation programme was supposedly heavily influenced by the Dem vs Rep campaign donation choices of GM auto-dealers].

Never in the US auto-sector's history has so much change been seen. As a result of that drastic surgeory which spanned major liposuction, cardio-vascular re-routing and skeletal support, the organic element of the company is indisputably different.

However, akin to any over-weight, artery clogged, arthritic patient, the surgeory can only normalise the organic. As important, if not more so, is mental (ie cultural) re-orientation For three reasons: to avoid re-lapse into destructive old habits, to recognise the reality (ie 'new norm') of the surrounding environment (of the global automotive arena, and GMNA's objective place within it) and to set-out a health improvement regime which re-builds understanding, character and innate strength.

This was always was set to be the substantial post-apocalyptic challenge – and it has now arrived.

Yet after so much positive yet painful traction, enabled by 'text-book' actions and oiled by Washington, as the company nears the eve of its IPO – for an expected 20% disposal of the government stake – two events of a macro and micro nature, point to a behind the scenes reality at GM which is marring the bright future previously painted.

1.At the macro-level, the candid description of the all to real re-emerging macro-economic headwinds availing themselves, depicted in the Risks (ie caveat) section of the S-1 document submitted to the SEC yesterday as part of the IPO procedure.
2.At the micro-level, the very surprising departure of Chairman Ed Whitacre, having seen successful emergence from Chapter 11 and offered two quarters of seemingly successful financial results.

Although not privvy to an inside view of the restructuring, investment-auto-motives has long been cautious about the reality behind the all too typical necessary but potentially over-played corporate bravado. In short questioning “what the store really looks like behind the Wall Street directed window-dressing”?

The question that always beset New GM was “in what manner would it approach re-listing onto public capital markets”? Of course much was dependent upon the positive or negative dynamics of those markets themselves, setting the scene for relative economic confidence throughout the economy and especially so the institutional and mom & pop investor. That said, once the market sharply rebounded from its March 2009 low-point, the rapidity of that rise – holding steady after 6 months and sustained for 14 months - essentially set the scene for an early presentation of New GM.

Market dynamics fitted well with the government's need to claw back its 'investment' in the company and so, given the record breaking valuation and size of the eventual full listing, commissioned the full gamut of Wall Street's big name investment banks to both act as book-runners and under-writers.

But since the recent topping-out of western capital markets, thanks to corporate earnings driven by a mixture of tail-end cost-savings and inventory re-building, unsurprisingly the age of what seemed continued, unfettered, but foundationally unproven jubilation has been somewhat scuppered.

This has engendered a 'reality check' amongst both touting corporate executives and their agent bankers. It is a very necessary reaction which in the larger context should help prevent the bursting of a mini-bubble. And crucially at the corporate level instills a conservative atmosphere of reasoned valuation.

Thus GM's change of tack. From a 'full steam ahead' stance to something more cautious. The initial reported intention of an all-out offering of Washington's & Ontario's complete stake, so riding buoyant market sentiment as a switch play from what seemed a bond bubble, has altered dramatically in the cold light of recent market jitters. Equity buys have slowed for even proven 'risk-off' buys such as infrastructure, pharma and sections of consumer retail, so the market acceptance of a large scale GM offering – even a stretch in itself – would have consequently diminished.

This is the reality which GM wisely conveyed in its S-1 filing, that 'risk-off' sentiment detailed by the still lack-lustre recovery in the US, Europe's economic drag and perhaps most importantly the contraction of vehicle demand in China as the PRC seeks to re-align its own economy; given the slowed demand-pull from export regions which by default helps keep the Renminbi tracking slightly lower.

Thus GM's S-1 recognition of a concerning slowed phase in the global economy must be seen to be seen, with GM no doubt an understanding that with slowed Chinese domestic demand hitting commodity imports along with increasing world-wide food-stuff prices, that even rebuoyed South American car demand may suffer as well; so seeing demand deflation across the globe.

But what of Ed Whitacre's untimely departure?

It is unexpected given his stand-by-thee reputation build at AT&T. Of course it was well recognised that he was parachuted into GM specifically to lend gravitas to and managerially underpin the floatation process, that is seemingly his craft. Yet as insightful financial press editorials have stated: the job is far from done, even if the environmental market conditions have changed. As has been reported. the CEO's role has been handed from the charismatic long-serving Wagoner, to the accounts clinical Henderson, to the re-orchestrational Whitacre and now to the more entrepreneurially renowned Dan Akerson.

Most interestingly, Akerson holds an MD position as Buy-Out Head at the private equity firm Carlyle Group.

Ideally Whitacre would have kept to his word of (to paraphrase) “not going anywhere for sometime”, since this would have given a much needed stability to GM mid and senior tier management, who quite frankly must be continually bemuddled even as corporate confidence builds. But the appointment of Akerson highlights perhaps not only greater care to pitch GM properly to the market, but also allow it to fairly value and dispose of its remaining interests in the essentially defunct Motors Liquidation Corporation.

The 'old GM' company - still with creditors in toe - has the remit of off-loading what are essentially reams of 'rust-belt' properties and plant Such asset disposal is typically not the remit or capability of typical auto-executives, their focus better directed in running the active side of the business. So instead, who better than a knowledgeable, value-driven, and deal savvy private equity player to undertake the role?

Brown-field industrial plots here and now seem to be the last asset class on people's minds, but of course it will be Chinese, Indian and SE Asian firms, who whilst cash-rich and enjoying steady income streams will be on the look-out for western acquisition deals throughout North America and Europe. As a way-in to serve the still sizable GM across the range of different vehicles systems: from possibly the likes of TATA in body construction, Bharat Forge in powertrain and suspension castings, Geely affiliated companies in trim and interiors and other Chinese companies in electrical and electronic harnesses and 'black-box'.

Identifying 'fair-value' asset disposal prices will be key, as will a 'simple and clean' no-nonsense agreements to enable quick legal conveyance of the properties and plant. If not as successful as planned in selling to overseas buyers, GM may need to look at the possibility of passing on such redundant land to the government as a part of an equity return deal. This would assist both GM and the government in terms of re-apportioning soft and hard assets to their natural places, GM holding more of its own equity and the state holding more of its own terra firma, but for better mid-term confidence and an improved outcome for long-term national prosperity, the attraction of Eastern FDI cannot be understated.

On paper the production active side of GM's business model has been reset to reach breakeven at an annual market volume (TIV) of 10.5m, given a maintained and projected market-share of approximately 20%.

[NB. Maintaining that 20% will be key, as recent marketing campaigns such as the 5-year/100,000 mile vehicle warranty highlights. Yet the level of competition is still severe, as seen by Hyundai's 7-year warranty, the need for Toyota to reclaim its dominance, Honda, Nissan & Suzuki incursion, aswell as critically the North American growth ambition of VW, Ford's retained hold and the obvious return of Chrysler (and latterly FIAT) as market forces].

GM cannot simply rest on its laurels of a transformation job well done under Whitacre, nor can it expect the capital markets to accept that miraculously all is now well, nor can it expect a windfall from its MLC asset-disposals, nor can it expect the future helping hand of Washington.

As the year-end IPO deadline approaches GM must be seen to be more far more than it has been. It has by Chapter 11 default escaped its image of endemic irresponsibility and mis-management.

But now New GM must present itself to be far more than a possible case of 'fur coat and no knickers'. This viewpoint generated by recent issues such as: partnership with a sub-prime lender to support sales volumes (vis a vis Washington's expectations), concerns regards the proliferation of creditor-warranty and convertible bonds related 'class-B' shares, and the surprisingly large reported pensions drag carried-over: which could not be culled under Chapter 11 given the scale of GM's social legacy.

Yes, GM enters a new phase, one in which it will be undoubtedly tested, but as with any buyer of a car, let alone a car company, it will need to have been 'tried and tested', before fully convincing the capital markets.

Theoretically, having ridden the support wave over the last year,its present $32bn cash pile would allow it to prove itself without the need for immediate new capital injections. If all is truly stable, that would surely be the expectation from investors, and the acid test for GM. Thus avoiding the IPO as effectively an avenue to 'Lemon Aid'. Exactly how it conducts itself throughout this new period of 'stretch' of retracted consumer demand will be testament to its current and future capability.

Whilst Akerson is promoting divestment potential the fundamentals of the IPO's confidence relies upon operational acumen, and drafting a tenable payment schedule from its investment funds to meet its still weighty pensions obligations without having to 'bet the farm' on high risk choices.

These irredoubtable and crucial facts are recognised by the financial press, sector analysts on both side of the buy-sell deal and critically Washington itself. And no doubt by Akersen himself.

Having come so far, no matter how 'lady-like' its appearance, GM cannot afford to 'pull a fast one' on the markets, expecting a latter case of a rising tide lifting all boats. This IPO registration process is vitally important for the corporation and the country. Certain quarters of the press have already hinted that "Dan Akerson's number should be up", but we can only allow investor 'registration numbers' to tell the ultimate tale. Black versus Red labels are all to easy to affix before the event. Yes it may be a strenuous hill-climb yet, but that all important S-1 document at least highlights the bumps in the road ahead, even if the possibility of black-ice is not overtly mentioned.

So, from the basic operational and balance sheet out-look, investment-auto-motives is yet to be convinced of GM's fully-recovered return. But that declaration of horizon risk indicates an renewed atmosphere of prudence at GM which should be welcomed, even if investor breath must still be cautiously held whilst fully assessing the floatation worthiness of the GM vehicle itself.