When Robert Mulcahy, a financial adviser in the Detroit suburb of Wyandotte, first learned General Motors planned to take itself public again, he was sure it would end badly. Many of his clients had once worked for GM or owned shares in the company before its spectacular bankruptcy and bailout last year, and even if they didn’t, their fortunes were inextricably linked to the automaker since it dominated every aspect of the region’s shattered economy. GM’s collapse, and its subsequent incarnation as “Government Motors,” spawned bitterness and resentment, leaving Mulcahy convinced local investors would never go near GM again.
Then, as GM’s stock market revival approached, all that changed. “It was absolutely the opposite of what I expected,” he says. “Most of my clients may not have bought on the IPO but they’re all sniffing it out, ready to get back in. There’s a sense of pride and excitement here that has not existed for quite a while.”
Forget cash flow analysis and balance sheet ratios—GM’s IPO last Thursday tapped into something far deeper, not just in Detroit, but across the U.S. When the company flamed out last year, it became a potent symbol of the meltdown: an indication that America’s best days had vanished in the rear-view mirror. Now, in a similar way, GM’s success of late and its huge public offering have come to represent a hope, if not a belief, that the country has found its economic footing again. It’s not nearly that simple, of course, but as the emotional roller coaster of the crisis and recovery balances out, GM’s turnaround can’t help but be seen as an important touchstone.
“This wasn’t just some random company that got big enough to go public, this is GM, the American horseman of the 20th century,” says Bernie McGinn, president of McGinn Investment Management in Alexandria, Va. “The success of the offering went a long way to create enthusiasm in the American economy, which has been missing for the last three years. The IPO was a symbol of the American recovery, even if people don’t recognize it.”
With the rev of a Camaro engine, the reincarnated GM kicked off trading on the New York Stock Exchange and the Toronto Stock Exchange last Friday with the largest IPO in U.S. history. GM’s owners, which include the U.S., Canadian and Ontario governments, sold shares worth roughly US$23 billion amid surging demand. The move slashed the U.S. Treasury Department’s stake from 61 per cent to roughly one-third, while Ottawa and Ontario cut their ownership to 9.6 per cent from 11.7 per cent. All told, the three governments recouped roughly one-third of the US$60 billion they’d spent to bail out the company 14 months ago.
To be clear, there was nothing spontaneous about the success of GM’s market encore. It was carefully scripted and produced with all the polish of a Hollywood blockbuster. To ensure the stock found a receptive audience in the investment community, two teams of GM executives gave more than 160 presentations to potential shareholders in the 10 days leading up to the IPO. Meanwhile, investment bankers and analysts talked up GM’s prospects. With anticipation building, GM boosted the initial price of its offering twice before the big day, further stoking buzz among investors. After debuting at US$33, the stock immediately shot up above US$35, though since then it’s drifted back down to around its IPO price amid an overall slump in markets. (If there was a flub, it happened in Canada, where a Vancouver penny stock, Geo Minerals, already claims the GM ticker symbol, forcing GM to settle for GMM.)
Almost immediately, links were drawn between the turnaround and the revival of the American economy. Mark Perry, a professor of economics at the University of Michigan, told the Detroit News the strong offering “shows the resiliency in the U.S. manufacturing sector and the resiliency of the U.S. economy.” Speaking at an automotive conference, Tim Leuliette, a director at Visteon Corp. and a former U.S. auto executive, told investors that buying shares in GM isn’t about hoping for a quick three-month jump in prices. “You’re into GM because a critical element, a critical building block of the U.S. economy, has significantly repositioned itself to be competitive in what will, over the long term, be a very attractive position.”
It was a theme officials in both Washington and Detroit were keen to emphasize. “This is a great day for General Motors. It’s a great day for Detroit. It’s a great day for Michigan. It’s a great day for America, and it’s all because of you,” GM’s CEO Dan Akerson told employees. Meanwhile, President Barack Obama drew a parallel between the company and the country. “Just as I had faith in the ability of our auto workers to persevere and succeed, I have faith in the American people’s ability to persevere and succeed.”
It used to be said that as GM goes, so goes the nation, which reflected the company’s important role in American commerce in the last century. But while GM’s actual contribution to the economy has steadily shrunk since the 1960s, the financial crisis gave new meaning to that old saw. GM had become a bloated, indebted and unproductive company wholly reliant on financial engineering to mask its fatal flaws—just like the U.S., said critics. So when the company collapsed, it fit squarely into the narrative of America in decline.
Today, GM is a far slimmer, healthier operation. The company has laid off thousands of employees, shed many of its pension and health care obligations and closed hundreds of poorly performing dealerships. Several plants were shuttered, while brands like Hummer and Pontiac were hived off or simply terminated. At the same time, strong sales of revitalized models like the Malibu, not to mention a conscious decision to wean itself off deep discounts, means that on average the company makes money on each car it sells. Where building a vehicle used to leave GM another $1,000 in the red, today it generates roughly $3,000 in profit per vehicle sold. As a result, in the lead-up to its public offering, GM posted three straight profitable quarters. It’s third-quarter profit of US$2.16 billion was the largest in six years.
At the same time, things have certainly improved in hard-hit Detroit, says Mulcahy. Companies are hiring, consumer confidence is on the rise and retailers are seeing customers come through their doors again. And there are mounting signs of a broader revival in the U.S. economy. Just this week, third-quarter GDP growth was revised up to 2.5 per cent, handily beating analyst expectations. The parallels to GM can only be extended so far, though. GM’s transformation was only made possible because the company had government money to support it as it restructured its debt and slashed costs. There’s no one capable of bailing out the U.S.
There’s also an irony in the belief that GM’s revival reflects a turnaround for the nation. The growth that will drive the automaker isn’t expected to come from America, but from buyers in the so-called BRIC countries: Brazil, Russia, India and China. GM forecasts that in China alone sales of its vehicles next year will jump 15 per cent. While vehicle sales in America have rebounded from the abysmal lows reached in 2009, they’re still far below their pre-recession highs of around 16 million a year. Sales this year are expected to come in at around 12 million.
GM still faces a tough slog, say analysts, who urge exuberant investors to be cautious. In the fine print of the prospectus GM put out ahead of its IPO, the company admitted its “disclosure controls and procedures and our internal control over financial reporting are currently not effective.” The U.S. government still retains the right to influence management decisions where its interests are concerned. And the company’s restructuring is far from complete. It warned fourth-quarter profit will come in at a “significantly lower level” than earlier this year.
There are plenty of critics who maintain GM should have been left for dead and not bailed out at taxpayers’ expense. Others argue that to have done so would have cost the government even more in the long term. But what’s been lost in the debate is the importance of GM to the American psyche. As the IPO demonstrated, that link is alive and well.