The New GM – Who Will be Left Holding the Bag?

by Richard H. Frank

On August 11, 2010, Daniel F. Akerson was elected CEO and Chairman of the Board for the “New General Motors.”  That will make three CEOs in approximately 14 months since the company emerged from bankruptcy in July 2009.  The announcement comes on the heels of statements made on August 5 by the current “soon to be “past” CEO Ed Whitacre, made at the Automotive Industry Conference held in Traverse City, MI.  Mr. Whitacre’s statements alluded to the fact that, in spite of posting YTD profits of $2.2 billion over the two quarters of 2010, now might be premature to entertain an IPO for stock in the company.  Although not being specific with regard to when such an offering might be appropriate,  his remarks seemed to indicate continued profitable performance might be prudent with establishing a date to go forward with the initial public offering.  Mr. Whitacre’s tenure as CEO will end on September 1, 2010 and he will officially exit the company at year’s end. Coincidence?  I think not.

Examining the Second Quarter earnings report may lend credence to Mr. Whitacre’s cautious approach to pursuing an IPO at this time.  The company reported earnings of $1.33 billion on revenue of $33.2 billion or a whopping 4%, thus bringing  their cash reserves to $32.5 billion.  No accounting is available to determine what portion of the reserve is a result of the original $50 billion cash infusion by the Government to acquire a 61% share in the company.  Nonetheless, the company has experienced two quarters of profitability.

Second Quarter sales of 731,000 units were split between fleet purchases at 42% for autos and 28% for trucks which leaves retail sales at only 30%.  Retail sales continue to lag behind fleet purchases due to the ailing economy, unemployment and the reticence of banks to lend money for consumer spending.

Major fleet sales usually occur during summer months and therefore have a major influence on units sold during their replacement period.  In spite of this fact the New GM lost market share year over year from 19.5% in 2009 to 18.6% in 2010.  Mr. Whitacre’s caution to watch the 3rd and 4th Quarter performance and the potential reduction in fleet sales volume may in fact be spot on.

Despite a deterioration in market share and cautious remarks by Ed Whitacre, the Board of Directors decided to replace Mr. Whitacre on the high note of having achieved $1.33 billion in profit for the last quarter and electing a new CEO, in the person of Daniel F. Akerson, who has announced the filing for an IPO, possibly as soon as Friday August 13, 2010.  I hope Akerson is not superstitious.

So the question all these actions over the past 2 weeks pose is “Why the Rush?”  Could it be that President Obama needs to do something to show how he has saved the American Auto Industry and breathed life into the corpse of the once dead General Motors Corporation? Or is it possibly that the November mid-term elections are fast approaching and he needs to show an effort to recoup the remaining $43 billion bailout in an attempt to gain voter support for his failing fiscal policies?

My personal experience with IPOs is that it takes more than two quarters’ profitability to constitute a reason to invest in any venture. Assuming the company proceeds with the IPO it seems doubtful that they will be able to secure $43 billion let alone establish a credible value for their stock offering.  What of the shareholders of the “Old General Motors”  who hold paper supposedly valued at $.75 a share? Do they have any equity in the New GM?  I think not.

The old adage to “beware strangers bearing gifts” holds true for any IPO for the new General Motors.  Political motivated or not, the track record of profitability coupled with the present economic situation in America should make any private individual  think twice before buying any stock in this company.

The answer to who is left holding the bag with regard to General Motors is either or both of the following:

“You”, the tax-paying public under Obama Motors, and “you” the individual investor as part of an IPO, along with the taxpayer for any portion of shares not sold to cover the $43 billion bailout.  The only people to get rich on an IPO or a bankruptcy are the lawyers and the executives contracted to manage either event.

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