Are IPOs the answer for capital Sometimes

September 19, 2010
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It hasn’t been easy for businesses to find private capital over the past two years. One way some companies have accomplished that is through initial public offerings, which have risen since 2008. Renaissance Capital reported that 107 IPOs have been held in the last 12 months through August, with technology, financial, and energy firms combining for 52 of those.

But the biggest is still to come. General Motors Corp. is reportedly preparing its offering and some wonder if it will be a game changer, returning the IPO market to the levels of 2004 to 2007 when more than 200 were offered each year and volumes reached $60 billion. If so, it could free up more capital for business.

Jeff Lambert, principal of Lambert, Edwards & Associates and an investor relations consultant, said the GM stock offering is “certainly not just another IPO.” In fact, he felt it could be one of the five largest of all time. At the same time, he said it was difficult to say whether investors should buy in at this point, without knowing the share price. “But all expectations are it’s going to be fairly aggressive.”

Lambert said a couple of viewpoints have to be considered regarding the automaker’s offering, since 61 percent of GM is government owned. “From the professional investors’ perspective, they have to ask the question: Do I want to co-invest with the government?

“That’s not a real exciting prospect for the professional investment community, and that’s really where the bulk of the placement is going to be,” said Lambert, whose firm is currently working on two pre-IPO offerings.

“From a fundamentals perspective, you’ve got to compare GM to its peers, and some of their peers have been doing very well. In valuation and performance, Ford is probably the highlight of that. As an analyst, I would suggest that investors need to look at that valuation. But I would recommend that (GM) try to price it for success and create some momentum,” he said.

“The government and all the investors that are selling into this don’t have to get their money back at the IPO. There should be an opportunity for growth. Bankers will debate that with potential buyers, but the final point is, the money from this IPO is going to pay off debt and not grow the business.”

Lambert said investors typically see a growth IPO as being more valuable than one that covers debt. He noted, however, that this IPO has value for consumers and for Michigan, and he added that the offering was a move in the right direction for the automaker that recorded a few recent wins with the Volt and Cruise launches.

“This is a momentum builder — moving out of that perception of being government controlled to a publicly traded company — and is another step down the path of a kind of re-emergence. It’s a good thing for the state and a good thing for the auto industry,” he said.

GM hasn’t set a date for its IPO. Lambert said GM was targeting November and company officials are talking with investors now to determine what the share price should be. He said he didn’t have a sense of what the price should be and wouldn’t offer a guess. But he did say there was room for the retail investor in this offering, due to its sheer size, and that it would be good for GM to have consumers as shareholders in order to form a stronger connection to its products. As for the volume the IPO could generate, Lambert said that would be dictated by whether the share price appeals to investors.

“I think there will be a lot of critics who will say you didn’t get the price that we thought or that (GM) originally thought. I think that’s why it’s important to manage this as another milestone in their overall kind of re-emergence of the company, and not hang everything on the price of the IPO as indicative of whether people believe in GM or not,” he said.

“What I’m most concerned about is, can they sell cars? On the product side, they’ve done a pretty good job.”

Lambert didn’t think that the overall IPO market would be negatively affected if GM’s offering wasn’t successful. He did say, however, that an unsuccessful IPO would result in a step backward for GM, and would come at a crucial time after the automaker had taken a few positive steps forward. While he stopped short of saying that a successful GM offering would be a headline-grabbing, game-changing catalyst for the IPO market, Lambert said a strong showing by the automaker could leave investors feeling optimistic.

“I don’t think it’s going to have a dampening effect on the market if it does poorly. But I think it could have a positive impact if it does well,” he said of GM’s debt-service offering.

“We’re not quite in a typical IPO cycle, and I think we’re probably looking at 2011 before we’re in that more growth-oriented IPO market, where people are watching IPOs as an indicator of the overall market’s health.”

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