An Update On The GM IPO: The Numbers Don’t Add Up
There was a lot of other news last week – Yahoo’s CEO was fired, Fannie Mae and Freddie Mac sued seventeen banks for faulty mortgage securities, Groupon decided to delay its IPO. I could have written those stories and captured the breaking news traffic. But instead my attention was directed to GM when my trusted investor “straw man” reminded me that GM’s current stock price is much lower than the IPO price and far short of the target for a U.S. Treasury breakeven on the investment.
I like those kinds of posts. I’ve racked up a few winning short calls recently – Citigroup and Bank of America notably.
The price is half what it was at the beginning of the year and nearly thirty percent less than at the beginning of August. What Buffett’s bolster does do is get the stock price back up. The shares were more than 20% higher in pre-market trading, which put Buffett’s warrants in the money instantly. The increase in share price diverts attention for now from the gaping gulch, the catastrophic crevice, the vast expanse of dead space that had developed between Bank of America’s book value and its market capitalization.
My negative outlook on the GM IPO looks to have been spot on. All that’s left for GM, I warned their spokesperson, is a restatement before the Presidential election. If that happens, everything I predicted back in November will have been on the money.
From my Forbes column last Wednesday, “Numbers At General Motors Just Don”t Add Up”.
“…CFO Liddell quit, reports said, because he was unhappy about being passed over for the CEO job. Maybe he was just tired of leading all those “various initiatives to further enhance our controls over period-end financial reporting”.
Deloitte has been GM’s auditors for more than ninety years. They’re not going anywhere. You might think the risks of auditing a company that recently emerged from bankruptcy – given issues like goodwill, underfunded pension liabilities, significant deferred tax credits, a stake in a mortgage originator, and foreign currency exposure – are quite high.
But in 2010 GM cut Deloitte’s fees more than 20% to $55 million.
In spite of all the work GM had to do to “remediate” the material weakness, Deloitte supposedly did much less. The firm is comfortable – like PwC at AIGor KPMG at Citigroup – in the knowledge that the U.S. Government would never swap it out regardless of how many times non- U.S. Government shareholders sue auditors.
In fact, Treasury probably agreed, as an owner, that it would be better for GM to finally get the weak financial reporting controls monkey off its back. Better for the stock price to quiet the critics who had one more reason to doubt the numbers.
Before the shares went on sale, Bloomberg reported, ”The Treasury needs to sell GM stock at an average of $43.67 each to break even on its entire investment, data compiled by Bloomberg show. That means the shares would have to climb to almost $50 for the government’s remaining stake to offset its loss in the IPO, the data show.”
What the Obama Administration didn’t count on was the general negativity in the market for anything other than new media IPOs, and even that enthusiasm has now waned…
Please read the rest at Forbes.