GM’s Initial Public Offering (IPO) on Thursday, Nov. 17, caused quite a stir, especially since the company had been in bankruptcy so recently — within the last year and a half. In spite of investor enthusiasm, even GM execs indicated that there was reason to be cautious. The company’s North America President, Mark Reuss, noted that GM still had a lot of work to do to convince consumers that it was on the road to recovery.
As one of those consumers, I am far from certain that the auto industry and economy are headed for an immediate recovery. Even though shares of GM sold for $33 on Thursday, $10 a share more than expected, the price per share still needs to rise significantly, at least if taxpayers want to get $27 billion in unpaid funds – and that is after Thursday’s stock offering.
In fact, investors would have to be willing to pay far more than $33 per share. Projected share prices would have to be around $55, going up more than a third before the government gets back the amount needed for the remaining percentage it owns in the company. It still remains to be seen whether investors will continue to buy shares over time, let alone pay more for those shares.
If stock prices fall or GM hits another bumpy patch, investors may well bail out. There are plenty of other variables to consider as well. The company has been profitable for a relatively short time, especially compared to the previous four years and a staggering $5 billion in losses.
Joblessness and home foreclosures are still major problems for many Americans, indicating that a rapid economic recovery is not a given. In Ohio, record numbers of foreclosures on prime fixed-rate mortgages occurred in the third quarter. Kentucky also had high foreclosure rates. Unemployment was considered a major factor for these foreclosures.
When Americans can’t even keep up with mortgage payments, it is hard to believe they’d spend money on a car – and car sales information indicates that consumers are still holding off on those auto purchases. Perhaps buying a new or even used car doesn’t seem like a necessity compared to rent, mortgage payments or paying for groceries.
It also isn’t reassuring to learn that CEOs at GM have come and gone quickly, with four chief executives succeeding one another over the last two years. Doesn’t a company with a past history of bankruptcy need a solid management team, a guiding vision, and far less turnover to win investor confidence?
Those who lost money (and I know plenty of those investors) may be among the most wary when it comes to trusting GM right now.They’ve been burned and don’t want to take any risks with their money, particularly in the stock market. They’re still trying to recoup their past losses as best they can and minimizing financial risks.
Finally, I have to take heed when even GM execs admit that much work is needed to reach company goals. GM North America President Reuss even noted that GM would have to “hit the ball out of the park here every day.” That could be a tall order, even for a company with billion dollar profits in the last year.
A solid IPO is an excellent start, but there are plenty of other variables to consider. These include consumers willing to buy new cars from GM, investors with the commitment to pay upwards of $50 per share for GM stock and the ability of the company to remain competitive in a tough auto market where foreign cars still take a huge bite out of American auto manufacturer profits.
Optimistic? I’m taking a wait-and-see approach.