Thursday, November 18, 2010

GM & It's IPO

We've been bombarded with GM IPOmania this week. Today is the big show.

Predictably, CNBC has been hauling anyone with a word to say about this onto their network to comment. A favorite has been one-time GM, Ford and Chrysler senior executive Bob Lutz. He was recently paired with Paul Ingrassia to debate various aspects of the IPO.

Lutz, of course, is a big cheerleader for the re-emergence of GM as a publicly-held entity, playing down the remaining 25% government stake in the firm. Ingrassia was more balanced.

Whereas Lutz crowed about the great Rattner-led government reorganization of the firm under Chapter 11, Ingrassia noted that it was GM's management that refused to do so when it would still have saved the firm from its ultimate failure.

Elsewhere, on yesterday's noontime program, former hedge fund manager Michael Steinhardt replied with an immediate, unequivocal "no" when asked if he would buy/hold the GM IPO. Steinhardt cited industry and competitive factors which offered more downside than upside potential in the years ahead.

CNBC's resident auto sector reporter, Phil LeBeau, was popping up distressingly frequently, backed by big electronic displays of data and analytics to stump for the GM deal. He ranted incessantly about how all GM needed was for the industry to return to some higher annual vehicle sales rates, and GM was just sure to coin money. In a November 3rd Wall Street Journal article entitled GM Could Be Free of Taxes for Years, the paper reported,

"General Motors Co. will drive away from its U.S.-government-financed restructuring with a final gift in its trunk: a tax break that could be worth as much as $45 billion.

Now it turns out, according to documents filed with federal regulators, the revamping left the car maker with another boost as it prepares to return to the stock market. It won't have to pay $45.4 billion in taxes on future profits.

The tax benefit stems from so-called tax-loss carry-forwards and other provisions, which allow companies to use losses in prior years and costs related to pensions and other expenses to shield profits from U.S. taxes for up to 20 years. In GM's case, the losses stem from years prior to when GM entered bankruptcy.

Usually, companies that undergo a significant change in ownership risk having major restrictions put on their tax benefits. The U.S. bailout of GM, in which the Treasury took a 61% stake in the company, ordinarily would have resulted in GM having such limits put on its tax benefits, according to tax experts.

But the federal government, in a little-noticed ruling last year, decided that companies that received U.S. bailout money under the Troubled Asset Relief Program won't fall under that rule.

The government's rationale, said people familiar with the situation, is that the profit-shielding tax credit makes the bailed-out companies more attractive to investors, and that the value of the benefit is greater than the lost tax payments, especially since the tax payments would not exist if the companies fail."

This extra sweetheart deal for the firm is yet another reason it should have gone through conventional bankruptcy. Then some other firm, seeing this special TARP-related benefit, might have paid up handsomely to acquire GM assets and the special tax treatment. As it is, the crony capitalism under which GM was "rescued" insulated the firm from outside pressures, other than the government, and unfairly penalized Ford by essentially rewriting the tax code for a newly-public GM.
Still, just because I don't like that treatment doesn't mean it doesn't have economic value. It does. The question is, how much of GM's attraction rests on special, one-time tricks and deals? Like the five-year union no-strike deal? Or the tax-loss carry-forwards? It's one thing to spin GM out with all these special deals, but it's another for the firm to make consistent progress on cost controls, revenue growth and total returns for shareholders.
The sector in which GM operates is still highly competitive. Many of its more effective competitors produce their US vehicles in Southern right to work states without unions. Any rise in annual US vehicle sales will result in GM's competitors fighting for the added share. It's not like AutoNation's Mike Jackson and CNBC's Lebeau suggest, which is that GM will somehow be assured of a healthy share of US sales growth. We still don't know that the firm can produce a full line of saleable, profitable vehicles for several consecutive years.
Does anyone really think GM's competitors will be standing still, so that the newly-public firm can just walk in and take new share?
Like Lucent when it was spun off from ATT, I prefer to wait a few years for the new firm to demonstrate its ability to perform in a consistently superior manner. And to do so in a sector that offers sustainable strength, thus making the firm attractive among a wide range of other equities one might buy.

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