It’s hard enough for investors to wrap their heads around a typical IPO or initial public offering of stock. If General Motors was just a start-up, it would be enough to comb through GM’s profit and sales numbers, purported risks and legal disclaimers. But the General Motors IPO faces another layer of confusion in the form of government influence upon GM stock and investor confidence.
GM is ready to go public again for the first time since its 2009 bailout, with the U.S. government set to sell a third of its shares in about two weeks. In preparation for this IPO, the government has filed its formal prospectus — and made some rather shocking revelations in it.
Most noteworthy are three clear signs in this SEC filing that the government knows Uncle Sam’s influence is bad for General Motors — as well as any initial investors, too.
Politics will gum up business
Perhaps the most glaring admission in the report is that politicians “may still elect to exert control that could be contrary to the interests of stockholders.” In short, Washington may use GM as a political football by ordering a factory built in a certain Congressional district or similar shenanigans. Those moves meant for the ballot box and not for the bottom line will not only hurt General Motor’s ability to grow and prosper, but will taint investor confidence until Uncle Sam is out of GM stock altogether.
GM has no confidence in its own financial reports
Another shocking line from the General Motors IPO prospectus is that “our (that is, the government’s) disclosure controls and procedures and our internal control over financial reporting are currently not effective.” In other words, GM and the Feds believe recent General Motors financial reports could be inaccurate – and thus any recent claims about the company returning to profitability or seeing sales growth could be overstated or flat out false. I suppose the government gets points for admitting this upfront instead of a year from now after glaring errors are uncovered, but it doesn’t do a lot to inspire hope in the company.
GM’s first stock to be sold at a hefty loss
And in the “actions speak louder than words” department, the government is so acutely aware of its own pernicious influence that it is willing to enter into the IPO at a significant loss. The government is selling just one-third of its General Motors stake for around $27 a share — about half what it needs to make a profit. So why would Uncle Sam do this? Frankly, because taking a brutal loss on one-third of shares is necessary to just get out from under its ownership. The U.S. Treasury is obviously hoping that by selling a large portion of its stake that private influences can do a better job running the show – and hopefully allow them to get a better price when they exit the rest of their position over several years.
Say what you want about the necessity of the bailouts for GM in 2009. But the sad reality is that even the government admits that its current situation with the car company is bad news for all parties – and that the best solution is to get out of the automaking business as soon as possible.
Unfortunately, that’s no easy task. The influence Washington wields over General Motors makes it unattractive to many investors, and without enough private capital to buy out the government is stuck holding the bag. It’s a Catch 22.
Time will tell how soon Uncle Sam can unwind his position in GM. But if these three points are any indication, until Washington is out of the equation it’s going to be bad news for the company.
Read the full GM prospectus here.
Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter at http://twitter.com/JeffReevesIP.