IPO Olympics: It's Cars vs. Tech in a Race to Save the Economy
Two key industries are lining up for IPOs right now: autos and technology. So far, we've seen much more activity in cars, with Tesla (TSLA) entering the public markets and General Motors (GM) returning to them, both in 2010. Next up? Chrysler (probably) and GM's former part unit, Delphi. Tech is anxious to catch up, but compared to manufacturing, it's not clear that any of Wall Street's Silicon Valley darlings will lead us out of recession.
Manufacturing adds to GDP, while tech encourages speculation
Reuters offers a quick take on the coming spare of auto IPOs:
The U.S. auto industry, which emerged from the punishing downturn of the late 2000s with sharply lower costs and higher profit potential, could see a robust pipeline of new equity offerings in the next 12-18 months...In other words, existing businesses in the auto sector that fell on hard times and were financed through bankruptcy by solvent, risk-hungry interests that now want out. But the essential point is that these companies have a history of being part of profitable enterprises that make a huge contribution to the world economy.The catalyst for auto industry dealmaking in the near term is expected to mostly come from parts suppliers that emerged from bankruptcy in the hands of creditors led by hedge funds and distressed investors, or in some cases private equity investors, dealmakers said.
Contrast this with the tech outlook, from the Motley Fool, commenting on multi-billion pre-IPO valuations for social networking companies like Facebook and Twitter:
There's going to be some huge winners in the social-networking space, no question. But attempting to pick the ultimate winners in an industry with extremely low barriers to entry will be an exercise in futility. Individual investors who blindly chase after these stocks following their IPOs are taking the same risks their dot-com-chasing counterparts took more than a decade ago. In most cases, it will lead to damaged portfolios and more than a few tears.Cars are not (yet) computers, and that's a good thing
A certain amount of dot.com meltdown recollection is to be expected, as the IPO market for technology is revived. After all, billions in value were obliterated, seemingly overnight. However, the stakes are a bit higher this time around, in the finance-constrained environment that the Great Recession has engendered.
The fact is that even if a lot of tech companies defy the odds and become major drivers of the economy, they'll never provide the boost that manufacturing can. A few thousand employees can make Facebook work. The U.S. auto industry requires legions of laborers. Tech simply isn't going to create -- or restore -- enough jobs to get the unemployment rate down to pre-financial crisis levels. It certainly hasn't provided a transition from the post-war, high-wage manufacturing economy to the new new thing.
Manufacturing is a better place to put capital
U.S. manufacturing makes up a smaller piece of the economy than it once did. At the moment, it's punching well above its weight, generating the broad growth that the American economy requires. In fact, you could argue that encouraging young workers to avoid manufacturing in favor of the service economy is a bad idea right now.
This is particularly true in the car business. In the aftermath of the Japan earthquake, Detroit is poised to make major, lasting gains over its Asian rivals. Motown is looking to hire tech talent. And IPOs in the auto sector aren't driven by venture capitalists looking for outsized returns, but by restructuring ninjas who took companies on their backs and optimized them for profitability.
Mind you, this doesn't mean that tech IPOs are bogus. There have been plenty of valuable ones in the past. It's just that after a recession this severe, tech isn't enough.
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Photo: GM Media