Initial Public Offering is refers to a situation where a small privately-owned company decides to raise capital by selling its stock to the public (Espinasse, 2011). When a private company engages in an IPO process, it transforms into a public company. An IPO process can also be performed by big private companies which have an aim of expanding their capitals to enhance expansion and trade in the security market. A company undertaking a public offering will first hire an investment bank to facilitate “underwriting” process. The underwriter assesses the value of the share and determines the public market on behalf of the company and when to bring the shares to the stock market. The underwriting firm helps the company to determine what type of security to issue, either common or preferred (Espinasse, 2011). Undertaking an Initial Public Offering can be a risky investment to the individual investor and the company since it is difficult to predict the stock price of the shares. This paper seeks discuss General Motor’s IPO of the year 2010 and how this impacted its operations and capital base.
Background of General Motors Company. General Motors Company is an American multinational automotive corporation. It is classified under the Automotive Industry. The company was incorporated under the laws of the State of Delaware in the year 1916. The company is most commonly known as GM. The company develops, assembles and markets trucks and cars (Crumm, 2010). The trucks and cars are sold in divisions/ brands of Chevrolet, GMC, Cadillac, Opel, Vauxhall, Buick, Saab, Pontiac, Hummer, Satun, Isuzu, Daewoo, Suzuki and Holden. The GM Company manufactures cars and trucks in 31 countries (Gall, 2011).
The GM Company has four segments. These include GM Europe (GME), GM Latin America/Africa/ Mid-East (GMLAAM), GM North America (GMNA) and GM Asia Pacific (GMAP). The Company has also two joint ventures in China, Shanghai GM and SAIC-GM- Wulling Automobile. In addition to production and sales, the Company also offers services such as vehicle safety, security and information services on vehicles (Gall, 2011). It also provides an automotive financing service through General Motors Financial Company (GM Financial). This company offers its services to 157 countries with 202,000 employees all over these countries.
GM Company has its headquarters at the Renaissance Center in Detroit Michigan where Ford and Chrysler are also based, the key automotive producers in U. S. By 2011, the GM automakers were marked as the world’s largest automaker by vehicle unit sales. The company approximately sold 6.5million automobiles in 2009 while in 2010 it sold around 8.4 million automobiles. The GM Company is managed by a board of directors.
The GM Company became privately owned in June 2009 but this was against the Security and Exchange Commission (SEC) filing regulations. The company suffered bankruptcy over the last years until 2010 when it made a total overhaul by becoming one of the world’s top five largest IPOs (Espinasse, 2011). The improvement of the Company was due to the backing of the Government in 2009. It is from here that the company in 2010 decided to undertake Initial Public Offering.
General Motors Company was operating in bankruptcy before July 2010 or before engaging in initial public offering. The total worldwide car and truck deliveries were 9.1million in 2006, 9.4 million in 2007 and 8.4million in 2008.The Company then received presidential counsel file for Chapter 11 reorganization under US bankruptcy laws. It then went forward and filed Chapter 11 in June 2009 (Saha, & Bhunia, 2011). This enabled the company to undergo restructuring and rid itself from unnecessary obligations and debts of $49.5 to bondholders. During the reorganization, other brands were rebranded and others were discontinued. The name plates like Oldsmobile, Hummer, Pontiac and Good wrench service brand were discounted. In addition, in the restructuring, the Company was required to repay all loans, interests and expenses under the UST Loan Agreement and to rationalize its costs in respect to employees, dealerships and suppliers (Saha, & Bhunia, 2011).
Therefore, the GM would be financed by Taxpayers from Canada and US loans. With the restructuring of US automakers, the US vehicle sales increased from 10.4 million in 2009 to 11.6 million in 2010. In realization to the collapsing trend of the GM automakers, the company had no option but to report and disclose its operational plan before making an exchange offer to Securities and Exchange Commission (SEC). The filing reported an asset of $ 82.29 billion and a debt of $ 172.81 billion (Saha, & Bhunia, 2011).
The common stock shares have only been traded publicly from November 2010 when the Company decided to undertake IPO on the New York Stock Exchange and Toronto Stock Exchange. As a result, the GM sold shares in its IPO at a price range of $32 to $33 compared with the last which was sold at a price range of $26 to $ 29. GM Company also planned to increase its sale from $ 3 billion to $ 4.6 billion. In November and December 2010, the Company consumed 550 million common shares and 100 million preferred shares and both of the securities were listed on the New York Stock Exchange and Toronto Stock Exchange (Saha, & Bhunia, 2011). After return to the public trading, the GM Company raised more than $20 billion on the New York Stock Exchange. The value of all the offered shares was estimated to reach $ 22.8 billion above the IPO by Agriculture Bank of China which was sold at $22.1 in July (Saha, & Bhunia, 2011).
GM IPO and Company Capital Index. The annual profits of the GM Company have been increasing since November 2010. The Company earned about $ 4.7 billion in 2010. This raised perceptions that it was able to carry forward previous losses in order to reduce future earnings of the taxpayer’s liability (Crumm, 2010). In fact it was a surprise to many that such a collapsing Company would emerge to be the worlds’ top five IPO. The initial public offering raised a record of $ 23.7 billion on its new stock for the GM Company. This amount was enough to pay back taxpayers and key shareholders like U.S. Treasury Department and the taxpayers. The Obama’s administrative action to further sell shares generated an extra of $ 2.37 billion leading to a reduction of the U.S Treasury’s stake to about 33% from the expected one of 40% (Crumm, 2010).
As a result of the GM IPO, the Company after the sales of shares of both common and convertible shares raised $ 23.1 billion additional capital share. The value of $ 23.1 billion in 2010 is higher than the IPO record in 2008 of $ 19.5 billion. The principle shareholders that benefited from the GM IPO include Voluntary Employee Benefit Association, United Auto Workers Union Ontario government and Canadian government. All the key shareholders accepted the equity following GM’s 2009 bankruptcy status. The offer of the shares increased from $ 33 per share to 35.9 per share during the first period of trading. The U.S. investors bought 90% of the shares; Saudi prince Alweed bin Tala al-Saud $500 million (Saha & Bhunia, 2011).The Canadian government which owned 11% stake equity as a result of 2009 rescue only sold 1% retaining 10% shares. The U.S treasury invested $ 49.5 billion in General Motors to keep it on afloat. As a result, the Treasury has recovered around $23.1 billion by the payments, dividends and interest since the GM recovered from the bankruptcy in July 2009.
By November 17, 2010 the GM reported third-quarter net income of $ 2.16 billion raising its earnings to $ 4.77 billion. This is higher than the profit made by Toyota City, Japan-based Toyota Motor Corporation of $ 4.46 billion profit in the same period. The GM Company also managed to increase its stock market shares from 0.4 % points in 2010 to 11.95 % in 2011 (Espinasse, 2011).
The GM IPO led to the foundation of GM’s battery car development program which created and retained more than 17500 job opportunities (Saha & Bhunia, 2011).The quality of the trucks and cars manufactured by GM also increased hence increasing the sales. This translated into additional profits. In 2010, General Motors Company earned $ 4.7 billion. In the same year the Company produced 8.5 million units which made it to be position two worldwide. The following year the GM was ranked first with the production of 9.025 million units. The sole contributor brand was Chevrolet brand with 4.76 million vehicles being sold all over the world (Crumm, 2010).
The IPO GM led to an increase in the Car sales by 23.5% while the sale of trucks arose by 3.9% according to September 2012 reports (Saha & Bhunia, 2011). Lastly, the Government of US invested around $25 billion in GM Company by January 2012. It is now the largest producer of car with a market share of 18.4% by the month of May 2012.
GM’s Stock Price Trend since the IPO in 2010. The GM IPO that was undertaken on 17 November 2010 at a share price of $ 33 was the largest ever in the market. In November 2011 the stock price of the shares dropped up to $ 20 per share a value lower than $ 33 per share in the year 2010 (Saha & Bhunia, 2011). Since then, the value of the GM IPO shares has never gone past $ 22. By 14 September 2012, the share price at GM’s was $ 24.14. This led U.S to experience a loss of about $15 billion on the GM bailout. However, the value has made US Treasury to hold on to the remaining shares arguing that the current stock price is too low and would lead to a big loss. This was contrary to the Company’s expectation. The Company expected a rise in the value of the shares to around $53 per share which would raise the profit by $ 2.31 billion. With this, the Company would be able to settle its bailout. In July 2012, the GM IPO shares remained stagnant at the range of $20 to $24 per share (Saha & Bhunia, 2011). The GM Company lost a higher percentage of its shares to Japanese Companies for the past 12 months.
The General Motors expected a sale increase of 2.8%. This was not met since the Company only reported an increase of 1.5%. This was as a result of line-up wise sales of Buick which recorded a sale of 7.90%, Chevrolet a sale of 1.5%, GMC recorded no increase and Cadillac only experienced a reduction of 1.3% (Saha & Bhunia, 2011). The uncertainties and unstable performance in the market sales disoriented General Motor’s ability to win customer confidence. This might also have discouraged potential investors in the company shares. Further, there is always a section of customers who spend time monitoring the performance of a company in the share market before resolving to purchase its products. With this fluctuating performance, General Motors might have lost out on some of the potential customers.
The Companies management is threatened with this declining trend in GM’s performance in the security market. Therefore, the GM fears that it can go back to the former state of bankruptcy that it experienced before deciding to engage in the Initial Public Offering (IPO). Despite the fact that the GM Company’s profits is declining, it still offers to its employee’s large amount of salary. In addition, the GM Company has gone an extra mile to offer education to its employees. This is a clear indication that the Company spends a lot on its employees. In the near feature if the stock market continues to degrade in value, it might force the GM to be operating with big debts. In addition, the Obama administration still allowed the GM company to continue deducting last losses from the available current profits, though the deductions is believed to have been cleared during the Bankruptcy proceedings (Espinasse, 2011).
Conclusion
The GM Company has made a small progress since 2010 to reduce their financial leverage, with about $16 billion of the key automotive obligations reduction. The Company also experienced a reduction in automotive debt by $11.2 billion and an improvement of underfunded status of U.S pension plans of about $ 4.7 billion. Despite the challenges the Company is undergoing, they have maintained the consistent levels of investment that has helped in the development of high standard vehicles. In the long run, the Company’s financial status will improve. Since the formation of the GM Company, no payment of dividends has ever been made on their common market. Therefore, any future payment of the dividends will depend on several factors. These include financial condition, earnings, liquidity, the secured credit facility, capital requirement and generally the business status of the company.