GM IPO: Pedal To The Metal Or Slam On
The Brakes?
The Dynamic Wealth Report
November 17, 2010
by Justin Bennett, Editor
One of the most anticipated initial public offerings (IPO) in recent
history is hitting the markets tomorrow.
Yes, General Motors (G.M.) is about to go public…
again.
After sitting in government hands for over a year, GM is about to be
reborn. The famed American icon is about to get a second chance at life.
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It wasn’t long ago the company was in a death spiral…
The financial meltdown of 2008 pushed the entire auto industry to the
brink of disaster. Credit markets froze as the economy went into
freefall. Buying cars was the last thing on consumers' minds.
The sudden drop in sales had G.M. reeling...
Years of poor management decisions and gaping holes in their balance
sheet already had G.M. on the ropes. The financial crisis simply
knocked them out. G.M. filed for bankruptcy in June of 2009.
Concerns about the auto titan’s failure were capturing headlines.
Many thought it would send the entire U.S. economy into an even deeper
hole.
So the U.S. government came to the rescue...
Government couldn’t let the 101-year-old company fail. Too many
American jobs were at stake. Unemployment was already surging and
if G.M. got wiped out, it meant over 200,000 people looking for work.
So Uncle Sam (cough… the taxpayer) forked over nearly $50 billion to
keep the company going. The enormous bailout kept workers at their
jobs and cars rolling off the assembly line.
But the move had some investors screaming foul…
Many called for the government to let G.M. fail. They insisted
capitalism should be allowed to work. In this case, buyers would
come in to pick up G.M.’s assets in a fire sale. The government
didn’t let that happen. They stepped in with a huge bailout.
Whether the government did the right thing or not remains to be seen.
Nonetheless, G.M.’s about to be born again…
The government is slowly putting the reins back into private hands.
With the IPO on Thursday, the U.S. taxpayer is going to start getting
repaid for their emergency investment.
Some were expecting a lackluster welcome back for G.M…
After all, investors were severely burned by G.M. the last time around.
Shareholders were wiped out and many creditors took a huge haircut on
their bond holdings.
With all this bad publicity, you can understand why investors would be
gun shy.
But in fact, the opposite is true…
Investor demand for G.M. shares is through the roof!
The company is issuing around $10 billion in common stock, yet there are
orders for over $60 billion. That’s right,
investors want over 6 times as many shares actually being
issued.
Shares were initially set to be offered at the $26-$29 range. But
now the price is being raised to between $32-$33 per share. When
shares hit the market Thursday, there could be a spectacular buying
spree.
Why is there so much demand for an auto company coming out of
bankruptcy?
As sad as the government bailout was, G.M. is actually set to be
profitable…. very profitable.
The company got a serious makeover in government hands. Cost
cutting measures are making GM leaner and meaner.
The company already reported a nearly $2 billion profit in their most
recent quarter. And with their position in overseas markets, where
most of the growth is, profits for GM should be substantial.
Should you be buying shares of G.M.?
If you can get your hands on them, the new G.M. shares appear to be a
good buying opportunity. Many analysts expect the shares of the
new G.M. to rise to the mid $40 range in the next few months.
The problem is, many brokers aren’t getting an allocation of the new
shares. This leaves many investors sitting on the sidelines
itching to get in on the action.
Is there another way to be a part of the G.M. IPO?
Take a look at G.M.’s competitors. If G.M. has 36% upside
potential in coming months, names like Ford (F) and
Toyota (TM) should see buying as well. After all,
both of these companies have taken market share from G.M. in recent
years.
• Silver (Under $26 an ounce)
After spiking to nearly $30, silver is pulling back in recent days. Concerns over rising Chinese interest rates, as well as higher margins
for silver traders, set the metal back. However, we feel this setback is
temporary and silver will regain its upward trend shortly.
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