GM IPO: Feds Deserve Credit for Smooth Liftoff

Last Updated Nov 20, 2010 2:51 PM EST

U.S. Treasury officials faced a delicate balancing act in setting the terms of GM's mega-IPO. Price it too low and watch the shares soar, a sign that the federal government was leaving money on the table. Price the offering too high and see it -- and GM's prospects as a public company -- fizzle.

Judging from the IPO's modest first-day gain of 3.6 percent, it looks like the feds got their footing just about right. That pop is well below the average 9.7 percent initial gain for the last 10 largest U.S. IPOs, according to the WSJ. The performance seems to vindicate the last-minute decision to boost the size and price of the IPO. GM on Tuesday increased the offering's price range to $32-$33, up from $26-$29, while swelling the allotment by nearly a third to 478 million common shares.

That appears to have subdued investor enthusiasm just enough to keep the IPO from skyrocketing, Lou Whiteman, a reporter who covers the transportation industry for financial media firm The Deal, told me. It means more cash for Treasury and for taxpayers, who will remain by far GM's biggest shareholder even after the issue. Pricing the deal aggressively also benefits GM's 35 underwriters, if not investors hoping for a bigger bump on the stock, because the banking firms' fee income is based on how much money a company raises.

More broadly, the offering was steady enough to boost confidence in GM's future and even stir hopes that taxpayers could eventually recoup their $50 billion investment in the company. As analyst Scott Sweet of IPO Boutique told Marketwatch:

"I've seen pops of 100 percent or more. Investors love it. But that would have likely brought out some barbs, heading straight for Washington," Sweet explained. "This was a high-profile, highly sensitive deal, so it's best they did it this way."
For their part, investors remain wary. That may have less to do with GM's earnings potential than the generally flaccid performance of most big IPOs. Writes Mark Hulbert, founder of Hulbert Financial Digest:
Though the average IPO company as large as GM hasn't lagged the market, it hasn't significantly outperformed it either.
So much for day one of the new GM. The bigger question is what happens now. As my colleague and auto maven Jim Henry notes, GM chief executive Dan Akerson claims the company has learned its lessons.

We'll see. Fact is, the company's fate may be tied less to the quality of its cars and efficiency of its operations than to whether the global economy comes back strong. A sudden downturn in China or India could send GM's revenues, and its shares, tumbling. No one is more aware of that than GM execs. Mark Reuss, GM's head of North American operations, sought to keep a lid on celebrations after the IPO:

The only thing we can feel good about today is that we are making progress and the second chance we were given by the taxpayers.
It's nice to be loved. In some quarters, of course, the government has taken a beating over its bailouts of GM and Chrysler. But it was absolutely the right move. Jobs, along with entire communities, were saved. The company used its trip through bankruptcy to make essential operational and management changes, and for now appears to have made a remarkably speedy recovery. Taxpayers at least have a shot of getting their money back. The system worked.

Indeed, nationalizing the auto companies worked so well that it raises another question: Why didn't we try this with the banks?

Thumbnail from Flickr user Jurvetson; interior image from Flickr user Mike Licht
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