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08.13.10

Is GM's Turnaround for Real?

The automaker's stunning rebound into profitability seemed to shock even those who made it happen. Paul A. Eisenstein on whether GM's IPO could release it from government's grip entirely.

What did he know and when did he know it?  For President Obama, that question isn’t about a scandal like Watergate, but about General Motors' profits.   

When the commander in chief came to visit GM and its smaller domestic rival, Chrysler, earlier in the month, did he know just how big the numbers would be for the second quarter? They certainly would have made it even easier to understand his seeming victory lap of Detroit, barely a year after the two manufacturers emerged from Chapter 11 protection.

While the numbers were nowhere near an industry record, the humbled giant still managed to put $1.3 billion in the bank, a whopping $14 billion swing from the second quarter of 2009. The turnaround is all the more dramatic when one considers that GM’s renewed profitability comes at a time when the United Auto Workers remains deep in the doldrums. Despite a modest upturn from last year’s ghastly numbers, 2010 sales are just about the worst the industry has seen since the Great Depression.  

“We don’t like the label of ‘Government Motors,’” laments Whitacre. “It turns customers off and it turns us off.”

Emerging from bankruptcy last year, former CEO Fritz Henderson promised that GM would be able to break even at an annual sales rate for the industry of 10.5 million. If anything, he now seems to erred a bit on the cautious side.  

Skeptics, of course, may question the company’s accounting.  After all, as a privately held manufacturer, GM does not have to abide by all those pesky rules the SEC holds publicly traded firms responsible for. So, barely a week ago, GM’s current CEO, Ed Whitacre, Jr., could openly signal that the news would be good. And good earnings at GM are something that both Whitacre—a onetime top fundraiser for President George W. Bush—and Obama clearly agree on the need for.   

To make it through last year’s court-ordered reorganization, GM had to rely on nearly $50 billion in aid from U.S. taxpayers. The automaker paid off the loan portion of that bailout several months ago, largely by using excess cash it had on hand from the Treasury fund. But that still left an additional $40.7 billion that the White House steered into a 60.8 percent equity stake in the “new,” post-Chapter 11 General Motors.  

While Whitacre has often said that the Obama administration has admirably avoided taking a heavy-handed role in GM’s day-to-day operations, he has also been chafing under White House pressure to stage an IPO as soon as possible to recover the rest of that money. Not that he would mind. The carmaker has taken plenty of criticism for relying on a federal bailout while archrival Ford Motor Co. somehow found a way to go it alone through last year’s catastrophic car-sales meltdown.  

Some right-wing commentators have gone as far as calling for a boycott of the company, though analysts like Joe Phillippi of AutoTrends Consulting say they haven’t seen any significant impact on GM’s numbers.  

Nonetheless, “We don’t like the label of ‘Government Motors,’” Whitacre lamented at an industry conference. “It turns customers off and it turns us off.”  

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So GM is expected to announce within days its plans for an initial public offering, which is likely to take place in time for the critical mid-term congressional elections—but after Whitacre’s planned retirement. The former head of AT&T is stepping down as GM's CEO on September 1.  

One question that could be answered in the coming days is how much of the government’s stake will be sold off. While many analysts had expected the IPO to cover only a fraction of that nearly 61 percent stake, Whitacre last week suggested the stock sale very well could take the government out of General Motors entirely.  

To recover taxpayers’ investment won’t be easy, however. Simple math says that new investors would have to shell out at least $113 for each of the Treasury’s 358.7 million shares, plus a buck or two to cover the IPO underwriters’ fees.  That would not only make this by far the most expensive new public offering in history—dwarfing the nearly $20 billion raised by Visa Inc. in 2008—but it would see GM shares going for roughly nine times more than what Wall Street is currently valuing Ford stock.   

One possibility, analysts suggest, is that the government’s shares could be split before the IPO to make things a bit more palatable.  

While GM has had two successful quarters, this year investors are likely to want to take a closer look to see if the nascent turnaround is sustainable, cautions analyst Phillippi, though he says the company is clearly moving “in the right direction.”   

A significant factor is that GM has been able to not just reduce its operating costs in long-troubled North America but also to reduce its dependence on the home market. Notably, the maker sold more cars in China during the first half of 2010 than it did in the U.S. And foreign markets now account for roughly two-thirds of its overall unit volume, though revenue lags a bit behind.  

There are still some potential pitfalls, including the threat of renewed economic problems both in the U.S. and Europe. And the German-based Opel subsidiary is still in the midst of a painful restructuring following the aborted plan to sell a majority stake to a Canadian/Russian coalition last year. And while the boom market of China offers tremendous promise, its growth has been slowing a bit in recent months.  

So, it’s still anybody's guess as to how the IPO will be received.  But that likely will be the worry of 61-year-old Dan Akerson, who joined the GM board of directors alongside Whitacre in July 2009, and who will shortly take over as CEO.   

Is Whitacre trying to cut and run and avoid being held accountable? No, he says, insisting on a recent media call with journalists, “My goal in coming to GM was to help restore profitability, build a strong market position and position this iconic company for success. We are clearly on that path. A strong foundation is in place and I am comfortable with the timing of my decision.”  

Wall Street will soon decide whether he’s right.

Reporter, publisher and bureau chief of The Detroit Bureau and TheDetroitBureau.com, Paul A. Eisenstein has covered the auto industry since 1979.  Eisenstein’s work routinely appears in such publications as The Economist, Germany 's Auto Motor und Sport, MSNBC.com, Cigar Aficionado, Wired, Motor Trend, The Daily Beast and dozens more.