Behind the GM Euphoria

November 19th, 2010 by Phil Mattera

Wall Street is always looking for a reason to be euphoric, and it found one this week in the return to the market of General Motors.

Less than two years after filing for bankruptcy and being taken over by the federal government in a $50 billion bailout, the automaker became the darling of investors and commanded a surprisingly high initial price of $33 a share.

Many of those investors had apparently not read the voluminous S-1 Registration Statement that GM filed with the Securities and Exchange Commission. If they had, they would have found a document that in its current iteration requires more than 13,000 words to summarize the risk factors facing the company.

Companies are required to be especially candid in warning investors what they may be facing when buying into a company whose shares are being offered for the first time (after its transformation GM is technically a new firm). But this prospectus is amazing. Here are some reasons why.

  • Acknowledging that its current chief executive and chief financial officer are from other fields, the S-1 says the company’s prospects depend on their ability to “quickly learn the automotive industry.”
  • The document reveals : “We have determined that our disclosure controls and procedures and our internal control over financial reporting are currently not effective. The lack of effective internal controls could materially adversely affect our financial condition and ability to carry out our business plan.”
  • The company admits that it has an image problem: “The automotive industry, particularly in the U.S., is very competitive, and our competitors have been very successful in persuading customers that previously purchased our products to purchase their vehicles instead as is reflected by our loss of market share over the past three years. We believe that this is due, in part, to a negative public perception of our products in relation to those of some of our competitors.”

Inexperienced management, poor financial controls and a negative public perception don’t seem to constitute a foolproof recipe for success. But there’s much more to the recitation of risk factors, including the fact that even after the stock offering the U.S. government will remain by far the company’s largest shareholder.

GM reminds potential investors that its bailout came with some strings attached. For one thing, the company is supposed to take steps to maintain its U.S. workforce at or near existing levels. If GM is a shining example of a renaissance of American manufacturing, as some observers would have us believe, it shouldn’t be a problem to maintain jobs in the USA, especially in light of the concessions that members of the United Auto Workers union consented to in order for the bailout to proceed.

But GM’s management hints that it might be interested in even cheaper labor abroad. The S-1’s summary of the company’s current business strategy includes the following:

Enhance manufacturing flexibility. We primarily produce vehicles in locations where we sell them and we have significant manufacturing capacity in medium- and low-cost countries. We intend to maximize capacity utilization across our production footprint to meet demand without requiring significant additional capital investment.

That sounds like a plan to expand foreign rather than domestic production. Elsewhere the company seems to be complaining when it notes that the federal government “may have a greater interest in promoting U.S. economic growth and jobs than other stockholders of the Company.”

GM’s management also bemoans the fact that “restrictions in our labor agreements could limit our ability to pursue or achieve cost savings through restructuring initiatives.”

In other words, the new GM is beginning to sound a lot like the old GM: blaming unionized workers for problems caused by management failures and market conditions. And like its predecessor, the new GM seems to be itching to dump more of those workers in favor of cheap labor abroad. This may be the main reason it is so eager to bring the federal role to an end.

If cost cutting on the backs of workers — rather than real innovation and competent management — is to be the focus of the new GM, it will probably end up in the same mess as its predecessor.

The investor excitement about the new GM may be good news for the federal government, but it could turn out to be just another market bubble.

Final irony: one of the big beneficiaries of the GM initial offering is Goldman Sachs, which in July agreed to pay the feds $550 million to settle charges of having deceived investors. Goldman is making about $9 million as one of GM’s underwriters.

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