When General Motors Co. filed registration papers for an initial public stock offering (IPO) on Wednesday, it also revealed the formidable challenges it faces - some of which may give pause to investors considering taking a stake in the venerable automaker.
The 734-page document GM filed with the Securities Exchange Commission (SEC) paints a picture of a company that is alternately confident about its progress since it nearly failed last year and cautious about the future.
The IPO raises the stakes for taxpayers who own 61% of GM and will be at least partially repaid based on its success.
For the government to recoup its full investment GM must achieve a stock-market value of $70 billion -10 times GM's market capitalization before the company headed into bankruptcy-court protection in June 2009, and at least $30 billion more than the market value of Ford Motor Co. (NYSE: F) according to data compiled by The Wall Street Journal.
The filing didn't include the size of the IPO, because Treasury officials will make that decision based on market sentiment and investor demand. Most observers expect it to raise between $10 and $15 billion, The Journal reported.
GM could face an uphill battle to convince investors to buy its stock in view of declining market share, less than a year of profitability and a management team led by a CEO new to the auto industry.
"It will be a tough sell because the company has only posted two quarterly profits and the CEO is stepping down," Peter Jankovskis, who oversees $2.3 billion as co-chief investment officer at OakBrook Investments in Lisle, Illinois told Bloomberg. "Those aren't the normal types of things associated with an IPO that's going to be highly subscribed."
GM last week said that Daniel Akerson, a former telecommunications executive appointed to the GM board by the Obama administration, will become CEO on Sept. 1, replacing Edward E. Whitacre Jr. The move is intended to give investors a clearer picture of GM's management team.
The document filed with the SEC provides the most detailed portrait of GM since the company emerged from bankruptcy.
In it, GM lays out a business plan that depends on its massive global scale to take advantage of its strength in fast-growing emerging markets such as China, as well as a cleaner balance sheet. At the same time, the company warns it faces many risks.
As part of the 16 pages of "risk factors" in the filing, GM warns that while the U.S. car industry has recovered this year, "there is no assurance that this recovery in vehicle sales will continue or spread across all our markets." GM also said its pension plan is underfunded by $27 billion, $10.3 billion of which is in the United States.
Retaining its share of the North American auto sales also will be a challenge, GM said. The company now has 17.8% of the market, which it forecasts will slip to 17.6% by 2014.
GM may face a decline in the Chinese market, where the company is a top performer and highly profitable, Joe Phillippi, principal of AutoTrends Inc., a consulting firm in Short Hills, New Jersey, told Bloomberg.
GM said destruction of its market-share can be attributed to declining perceptions of its brand among consumers. To address that, GM said it is moving to increase the fuel efficiency of its vehicles, which it said will be critical to long-term profitability.
"It's something they have been working on for a few years, Rebecca Lindland, director of IHS Automotive, in Lexington, Massachusetts told Bloomberg. "They're starting to see some results, but it's an ongoing battle for them."
Other risks outlined by the company include problems that could stem from global overcapacity in the car industry and rising costs of raw materials.
Although the company said its current plans call for no dividend to be paid on the common shares, GM will sweeten the pot by including preferred shares in the offering. Preferred shares, which have a fixed return, behave more like bonds than stock in the financial markets and may attract different types of investors.
Investors won't be surprised by the lack of a dividend on the new GM shares since Ford doesn't pay one, Linda Killian, principal at Renaissance Capital LLC, which researches and invests in IPOs, told The Journal.
The preferred shares will likely add to overall demand for the deal, since some buyers will take some common shares with the expectation that it will increase their chances of getting some of the more desirable preferred shares, Killian said.
GM shares will be sold exclusively by current shareholders, including the U.S. government. Another holder of GM shares, the United Auto Workers, also is expected to sell some of its stock during the IPO, people familiar with the situation told The Journal.
Though the Obama administration would like to begin exiting the car maker's business as quickly as possible, GM executives feel the company may need until late this year to prepare for the stock offering.
The SEC typically takes 30 to 90 days to review an IPO registration filing.
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