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GM's IPO May Raise Record Amount

November 17, 2010
4 min to read


General Motors Co. said Wednesday that it will increase the size of its initial public offering by about 30 percent to 478 million shares, which could make it the largest global IPO in history.


The move, which came despite broad stock market losses Tuesday, is a response to stronger-than-expected demand for shares in the auto maker, which is generating solid profits after last year's U.S. government-orchestrated bankruptcy.

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Earlier Tuesday, GM confirmed it would raise the expected price for shares sold in its IPO to a range of $32 to $33 from the previous $26 to $29. GM also plans to sell up to $4.6 billion of preferred stock, up from $3 billion previously planned. The IPO will be priced Wednesday after the U.S. stock markets close and the shares will start trading Thursday.


The value of the offering, including the mandatory convertible preferred shares, could reach $22.8 billion, eclipsing the $22.1 billion IPO by Agriculture Bank of China in July 2010, according to Thomson Reuters.


The GM issue would rank No. 5 among the largest stock sales of any nature, according to Dealogic.


If the banks underwriting the sale exercise an overallotment option, the IPO could grow to 550 million shares, bringing the value of the common shares to around $18.2 billion, significantly more than GM and the U.S. government had originally expected.


After the IPO, the U.S. government's stake in GM would fall to close to 26 percent from the current 61 percent, people familiar with the matter told The Wall Street Journal.

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The U.S. will sell 412 million shares, up from 303 million. A union-run retiree trust will sell 102 shares, up from 82 million. Canada's federal and provincial governments, which aided in GM's rescue, will stick with plans to sell 35 million shares.


At the new level, the U.S. government would raise around $13 billion, including the overallotment, at the midpoint of the higher price range. That's up from $8.3 billion at the lower price and share number.


The U.S. spent $49.5 billion to rescue GM last year. The auto maker has returned $9.5 billion; the Obama administration will seek to recoup the rest through the sale of stock over the next couple of years.


The decision to enlarge the offering was made late Tuesday afternoon. The U.S. Treasury, GM and its underwriters felt recent stock market declines wouldn't deter investors, a person familiar with the discussions said.


Some on Wall Street are concerned that GM and its banks may be overreaching, and that may crimp how much the stock rises in its first day of trading Thursday. Ordinarily, Wall Street banks who mange such offerings don't mind if a new stock issue rises 25 percent or more on its first day of trading, because the potential for such gains encourages money managers to buy shares. Indeed, the largest U.S. IPO in history, the $19.7 billion sale of stock in credit-card processor Visa Inc., rose 28 percent on its first day of trading in March 2008.

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But in the GM IPO, the underwriters are dealing with an unusual client: the U.S. Treasury. The government seeks to maximize how much it raises from the sale as it attempts to be paid back for its bailout.


The underwriters are targeting a first-day price gain of 10 percent to 20 percent, people familiar with their thinking said. If GM shares rise more than 20 percent, taxpayers might view it as a Wall Street giveaway to select investors.


"If they price it too low, they're messing with the U.S. taxpayer," said Frank Ingarra, co-manager of the Hennessy Funds, adding that he believes pricing of the shares has become a public-relations issue. "I'd rather go with things that the government isn't involved in."


Other big investors voiced the same concern. "I certainly hope that political considerations don't enter in" which could result in the underwriters setting the price at a level where "it doesn't do well," said Linda Killian, a principal of Renaissance Capital LLC in Greenwich, Conn., who manages a $10 million mutual fund specializing in IPOs. Ms. Killian said she hoped to buy shares in the offering.


Some analysts say at the higher current price level, investors have less incentive to buy. Tony Boase, an analyst at FAF Advisors in Minneapolis, a big GM bond holder, says he believed the stock is worth about $37 a share. "It looked at lot better" at the lower price range first proposed, he said.

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Despite such concerns, many money managers are eager to get in on the deal. Biondo Investment Advisors asked for 150,000 shares to divvy up between its Biondo Focus and Biondo Growth mutual funds, said Joe Biondo Jr., co-manager of the funds. But "based on the demand for the issue, I doubt we'll be able to get a lot of it," he said.


Because most IPOs rise, "for the people involved in the IPO, it's potentially free money, frankly," said Dan Genter, chief executive of RNC Genter Capital Management in Los Angeles. But if there's a big initial gain, he said, "the taxpayers and general public that bailed out GM have some basis for aggravation," given that the IPO shares appear tough to get, he said.

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