Welcome To the Grand Illusion

Welcome to the Grand illusion
Come on in and see what’s happening
Pay the price, get your tickets for the show

(“The Grand Illusion” – Styx)

The party is set to begin. Fanfare will blast from the rafters. Great hosannas will rain down from on high. General Motors, the official car company of the US Government, will be turned back into a private enterprise. The S1 filing with the SEC occurred; the IPO will take place in 30-90 days.

In fairness, it is somewhat of a good news story. GM will no longer be “Gubbermint Motors – Home of The American Trabant!” But there is a sense of artificiality to this entire filing. To quote an old blogosphere meme, “I question the timing!”

Joe Weisenthal, of Business Insider.com, writes up a good bare-bones briefing sheet on the IPO. According to the S1 on file, the underwriting syndicate is to Wall Street what the OJ Simpson Legal Defense Team was to the Legal Profession; a line up reminiscent of the New York Yankees when Joe DiMaggio still swung the stick. Morgan Stanley, JPMorgan, BofA/ML, Citi, Barclays, Credit Suisse, Deutsche, Bank, Goldman Sachs, and RBC all will be part of the syndicate. Details regarding syndicate management rights and take-down have not yet been negotiated.

The stock will go straight to the NYSE and will trade under the symbol GM. The offering will include both public and preferred stock. This, like everything else involving our Photo-Op President, will be a show, a party, and a gorge-fest in pointless excess. It will all be aimed at countering the perception that Barack Obama doesn’t love the free enterprise system and all that it entails.

It will be the first major corporate IPO in US History to double as a Democratic Party campaign advertisement. “Vote Team Donkey, we don’t really want to nationalize all your assets.”

Predictably, risk and moral hazard still abound. Like the old Soviet Ekranoplan Flying Boats, this IPO is a high-stakes, state-directed enterprise that may or may not ever make it off the ground. The SI filing details extensive entrepreneurial and external economic risks to GM in the near and far future. The S1 lists the business risks on page 13 of the filing. They continue until page 28.

Obvious, recession-driven risks include…Our business is highly dependent on sales volume. Global vehicle sales have declined significantly from their peak levels, and there is no assurance that the global automobile market will recover in the near future or that it will not suffer a significant further downturn.(P13, GM S1 filing) and also,“Failure of our suppliers, due to difficult economic conditions affecting our industry, to provide us with the systems, components, and parts that we need to manufacture our automotive products and operate our business could result in a disruption in our operations and have a material adverse effect on our business.”(p14)

Business plan risks include some goodies as well. They are still being pile-driven into the Astroturf by their prior contracts with the UAW. Our U.S. defined benefit pension plans are currently underfunded, and our pension funding obligations may increase significantly due to weak performance of financial markets and its effect on plan assets. (P16) The GM financier, Ally Financial has major capitalization issues. If adequate financing on acceptable terms is not available through Ally Financial or other sources to our customers and dealers, distributors, and suppliers to enable them to continue their business relationships with us, our business could be materially adversely affected. (P17)

They have a mongo conflict of interest risk. The UST (or its designee) will continue to own a substantial interest in us following this offering, and its interests may differ from those of our other stockholders. As a result of this stock ownership interest, the UST is able to exercise significant influence over our business if it elects to do so. This includes the ability to have significant influence over matters brought for a stockholder vote. (P18) And they owe the UAW their souls and first-born children as well. Restrictions in our labor agreements could limit our ability to pursue or achieve cost savings through restructuring initiatives, and labor strikes, work stoppages, or similar difficulties could significantly disrupt our operations. (p.22)

And since all of that doesn’t suck enough, they also, even with Barack Obama’s aid and abidance, were unable to successfully still all of their prior debt obligations. Despite the formation of our new company, we continue to have indebtedness and other obligations. Our obligations together with our cash needs may require us to seek additional financing, minimize capital expenditures, or seek to refinance some or all of our debt. (p.22) Not surprisingly, they have no plans on offering dividends on common stock.

The risk list finally dies. But only after listing several environmental and foreign government risks that I ran out of motivation to catalog, evaluate and include. The Hindenburg had a better margin of error than the current GM business plan. And beneath the surface of all of this lurks another risk that nobody other than I am obnoxious enough to publically air – the moral hazard that a politically-connected enterprise will saw off its creditors the first time President Barack Obama publically denounces them as speculators. Is the preferred stock in GM really going to remain preferred if President Obama decides he doesn’t like the people who own it? Try pricing that uncertainty using a standard quantitative model.

So there you have it. General Motors has filed for an IPO that has a significantly good chance to unwind a week or two before the 2010 Midterm Election. The hortatory sound bites just may save some marginal Democrats. But will the capital raised be sufficient to save a marginal car company? Only the cynical and world-weary offer prickly questions such as that one. In the meantime….

Someday soon we’ll stop to ponder
what on Earth’s this spell we’re under
We made the grade and still we wonder
who the hell we are.


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