G.M. Stock Offer to Retirees: Just Say No
When General Motors sells stock to the public this week the company will set aside 5% of the deal -- some 365 million shares -- for retirees, their surviving spouses and current personnel. At first blush, this IPO (initial public offering) is tempting. But buying into it would be a terrible decision.
Certainly, G.M. employees and retirees have reason to think about getting in on the ground floor of the car company's recovery in an effort to repair the damage their retirement plans suffered in recent years. Through their pension plan and other savings vehicles these folks owned a lot of old G.M. shares that went to zero.
Another attraction: this is shaping up as a hot IPO. The long advertised price of $26 to $29 a share has been boosted to $32 to $33 because of strong institutional demand, which all but guarantees that the stock price will rise in the first few days. Most individual investors don't have a shot at buying at the IPO price. Those who do may be able to flip the stock for a quick gain.
But rapid trades are not how you grow wealth over long periods of time, and this kind of investing sets the wrong example for your kids. Quick hits don't work with any consistency. Besides, even if G.M. moves higher initially, how will you know when speculative demand has been sated and it's time to sell?
Here are four reasons that G.M. current and former employees should stand clear of this IPO:
· You are too emotionally attached Employees and retirees already have much riding on the resurgence of G.M. in the form of wages and benefits, and possibly even psychological well being. That's a big stake. Why put more at risk here? There plenty other stocks to own.
· You learned the drawbacks of company stock Employees who are offered company stock in their 401(k) plans tend to own more than they should. This kind of concentration can wreck a portfolio if the company tanks, as has been the case many times in the past with firms like Citigroup, Enron, Bears Stearns and, well, the old G.M. Do you really want to load up again?
· The new G.M. is unproven Yes, the latest earnings report tells a rosy story. But this company is only 16 months removed from bankruptcy, and even after the IPO it will be 26% owned by the government; its unions will have a big stake too. Those are two powerful interests that may distract management from making the investments that are needed to make great cars.
· This isn't the roaring '90s Little more than a decade ago you could count on just about any IPO trading higher immediately and rising for weeks or even months before speculative demand dried up. We're in a different world today. A slew of IPOs from earlier this year are trading well below their offering price, including Global Geophysical Services (-42%) and S&W Seed Co. (-41%). True, those aren't exactly goliaths of global business. But after what you've just been through as a G.M. stakeholder, how would you feel about fresh numbers like those in your savings plan?
Photo courtesy Flickr user laciebabenco