GM Negotiates With Investment Banks, Hardballs To Sell Cars To Underwriters!0
Working Towards the IPO
General Motors is working hard at preparing an IPO that will be one of Ed Whitacre’s hallmarks of his time with the company. Our favorite automaker is looking at 2010 to be the year it offers its shares to the public, while at the same time increasing consumer confidence in its vehicles as well as the firm’s financial position. There are numerous factors that dictate the potential IPO and how the public at large will react to it.
The economic situation, the status of the IPO market, as well as terms set forth by investment banks are all primary concerns for GM and particularly for Whitacre. Many of the reservations faced by the GM’s CEO, however, can be put to rest already. JPMorgan Chase & Co. along with Morgan Stanley, won the account to sell GM’s shares for a quarter of the normal rate, with GM paying .75 percent of the sale.
A Seller’s Market
Although selling to public shareholders might prove to be a challenge, GM is in control of dictating terms with representative banks. A smaller market for IPOs means that more banks want to sell GM’s shares, empowering companies (including The General itself) to negotiate the terms of its public offering. GM is looking to leverage this position to increase company recognition, reputation, and even sales. Stock sales might be the number one priority with JPMorgan and Morgan Stanley, but selling Cadillacs, Chevys, Buicks, and GMCs are nearly as important, if not more so. And in an interesting turn of events, GM wants the banks to use the underwriting fee of 0.75 percent to subsidize GM vehicle purchases for the employees of the underwriting companies.
This sort of hardball negotiations are just what Whitacre was going for. As if impressively low fees weren’t enough, Whitacre also wants to see GM’s sales to continue their upward trend, even faced with the possibility of confusing investment banks for marketing firms (or even clients). On the other hand, GM has its own plan and wants to introduce their “ideas as to how we [GM] can use the IPO to reposition GM and its vehicles within the investment community including your firm’s willingness to reinvest any portion of any underwriting fees into the purchase of GM vehicles for your employees and/or company use.”
In fact, doing this plays to GM’s interest in luring the investment community into giving our favorite automaker’s products another look, as evidenced by GM’s possible opening of a Manhattan showroom that would showcase GM’s latest models.
One key incentive in GM’s race to an IPO is to shed some government control. Uncle Sam has retained veto power over GM’s independent selection of the banks and subsequent terms, such as the fees, but this time around, neither required vetoing. At first round of the IPO, GM plans to sell 20 percent of the government’s stake, bringing the Treasury’s ownership significantly below 50 percent (from 61 percent currently).
On the other hand, the government also wants to limit underwriting fees to avoid paying banks bailed out by the government.
As we write this, GM is busy putting together a schedule, size, and marketing methods for the IPO. However, before these things can become important, our beloved automaker needs to carefully monitor its own performance, the economy, and the IPO market. The General wants to file a prospectus within the next month and is hopeful for a November IPO. At between $10 and $15 billion, it could be the second largest IPO in U.S. history.[Source: Bloomberg Business Week]
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