When a government sells stock in a company, it is usually trying to maximize short-term revenue. Therefore, the share price is normally pegged at what the market will bear. If the valuation of the total stock offering is less than the value of the company (or a portion thereof) being sold, something is amiss. That is certainly the case with the initial public offering of GM stock sold to investors on November 17. The stock price is telling us something the federal government doesn’t want to admit, all the rhetoric about the supposed success of the GM bailout notwithstanding.
Take, for instance, the last IPO I was involved in, the flotation in 1996 on the London Stock Exchange of RailTrack, the company that owned the infrastructure of the formerly nationalized British Rail. The government of Prime Minister John Major wanted to raise around £2.5 billion in the privatization. However, the plan quickly unraveled.
Major’s government was on its last legs, as it seemed likely to lose the election of 1997. Moreover, spokesmen for the Labour Party — which did go on to win — started making noises about renationalizing the company and toughening regulations on the railroad industry. This scared investors and the government was forced to discount the offering, which sold at a measly 380p per share, ultimately raising less than £2 billion. However, the share price later rose quickly to reflect the market’s true valuation of the company, and investors reaped the benefits while the government reflected on what might have been.
If the federal government wanted to recoup its investment in GM, then the GM stock price should be much higher than the $33 initial price. In order to break even, as the Deal Journal reports, the stock price would have to rise to around $50 per share. So why is the Treasury Department selling off the company at a loss?
First, the government is what is known as a “motivated seller.” By offering such a low stock price, the administration is essentially admitting that it has no place in running an auto company. While GM’s financial position is much better than it was when it should have gone bankrupt, the company’s finances are not great. A quick crunch of any of the numbers in the GM prospectus shows the company is not the healthy organization the politicos would have you believe. They have done a poor job running the company, even if they did save it from going under by ignoring the law and throwing billions of dollars at it. The sale prospectus even admits “our (that is, the government’s) disclosure controls and procedures and our internal control over financial reporting are currently not effective.” Hardly a ringing endorsement!
Second, they’re not the only ones in the game. The unusual bankruptcy settlement for GM granted a significant portion of the company to the United Auto Workers. The union is in this game too, even though it has no investment to recoup. The UAW is selling around 18 million shares, so it stands to gain about $500 million for its pension fund — at taxpayers’ expense.
Finally, just as with RailTrack, there is considerable political risk involved. If the feds could nationalize GM once, they can do it again. The company admits in its prospectus that “The UST [U.S. Treasury] (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.” It suggests that government might interfere in “The selection, tenure and compensation of our management; our business strategy and product offerings; our relationship with our employees, unions and other constituencies; and our financing activities, including the issuance of debt and equity securities.” Furthermore, the government has asserted sovereign immunity, meaning that the IPO is not subject to anti-fraud laws.
This might sound familiar to RailTrack investors. The Labour government of Tony Blair eventually forcibly bought out RailTrack stockholders at a price of around 250p — a loss of about 35 percent from the heavily discounted price at which the stock initially traded. By selling GM stock at a loss, the federal government is giving us fair warning, and admitting the bailouts’ enormous cost to the taxpayer.
Iain Murray is Vice President for Strategy at the Competitive Enterprise Institute. This column is not intended to offer investment advice on the GMO IPO being offered on the back of taxpayers, car dealership workers, and pension funds.