GM IPO: If Geithner Did His Job Correctly, The Market Should Be Peaking

by James Bianco
Bianco Research
November 18, 2010

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The Wall Street Journal – GM Stock Sale in High Gear
General Motors Co. is on pace to sell $18.1 billion in shares in what likely will be the second-largest U.S. initial public offering ever, capping a remarkable two-year turnaround in which the car maker went from begging for a government bailout to posting its first steady profits in more than six years. GM sold about 478 million shares Wednesday at $33 each, a price higher than the company and its bankers thought was possible just days ago. An additional 71.7 million shares are expected to be sold by GM’s bankers as part of an “overallotment” allowed when sales are stronger than expected. And it sold $4.35 billion in preferred shares…The proceeds will help pay back the U.S. government for the $49.5 billion it spent on its controversial rescue of GM, which has gone from losing billions of dollars a year to making $4.07 billion so far in 2010…The U.S. Treasury will cut its ownership stake in GM to about 26% from 61% through the stock sale, including the overallotments. That could ease the “Government Motors” taint that had turned off some car shoppers as well as potential GM investors…Investors and analysts watch for the size of the first-day “pop” of an IPO. If the shares rise more than the usual 10% to 20%, some observers may say GM and the U.S. charged too little and left money on the table. If the shares falter, it will mean some investors still question GM’s future.

Comment:

The job of the seller in an IPO is to receive as high a price as possible. The job of the buyer is to receive as low a price as possible. Who does a better job?

See the table below. It shows the Conrail IPO (then a record size) and the 10 largest deals done since then. Many of the largest IPOs were done right before a market peak and just as the market was coming under stress (rushed out?). The average return of the S&P 500 over the 6 months following these blockbuster IPOs is -2.41.

The table below suggests that the sellers of the largest IPOs are often excellent market timers. The majority of the time the S&P 500 is lower 6 months later.

<Click on table for larger image>

Similarly, as the monthly chart of IPO flows shows below, when IPO volume peaks, the market often struggles over the next 6 months. Again, if you’re the seller and doing your job correctly, this is what you want.

<Click on table for larger image>

Academic studies of M&A deals show that the seller often gets the better deal even though the buyer gets all the positive press and accolades. The same appears to be true of IPOs.

How well did Tim Geithner do his job? If he received as good a price as possible, then the market should be near or at a peak. If the bull market is still intact GM has further upside, then he did not do as good a job.

Trading started yesterday morning.