Sometime next year, you may be able to invest in General Motors again. Should investors even consider doing that? Let’s first look at some recent history.

Last July, a newly formed company called NGMCO bought the brands and business we knew as General Motors in a bankruptcy sale. NGMCO promptly changed its name to New General Motors Company. The creditors and stockholders--bag holders might be a better term--found themselves looking to Motors Liquidation Company, another new entity which holds those GM assets not transferred to NGMCO, for satisfaction. There won‘t be much of that.

Motors Liquidation Company shares are valued at 65 cents but are not available for sale to the public, nor are shares in the New General Motors Company.

All of that was part of what we call the bailout of General Motors, and depending on whose figures you use, it cost taxpayers here and in Canada about $60 billion. The new GM will set performance targets in December of this year and if it shows signs of meeting those targets, it may issue stock to raise capital on which to operate and with which to reduce the approximate $48 billion in debt that the new company has.

A first-time issuance of stock to the public is called an Initial Public Offering or IPO and should GM do one, it will not likely occur before mid-2010.

Once, when Masters of the Universe roamed the earth, investors fought over the right to be first in line to buy shares in an IPO. An IPO share back in the day could rocket from $10.00 at mid-morning coffee break to $75.00 at lunchtime.

During the recent unpleasantness which began spreading over the financial world in the closing days of the Bush administration, IPO activity all but ceased, and in any case shares are now allocated using a complicated formula aimed at reducing rampant speculation.

Let’s assume that the New GM Company announces that it’s pressed the button on a 2010 IPO and that you can now buy into it. Should you?
 
We asked Eddie Guillot, a wealth management and syndication specialist with Morgan Stanley Smith Barney how an investor should evaluate an IPO opportunity. “You’re evaluating a company, not a stock issue,” he said. “You look at the overall health of the company, its earnings record, debt service obligations and whether it has a clean balance sheet.” Excellent advice, and we can apply it to the new GM.

The overall health of the company has been improved by reducing its number of divisions from eight to four: Chevrolet, Buick, Cadillac and GMC. Pontiac, Saturn, Hummer and Saab have or are in the process of following Oldsmobile into history.
 
Among other factors that a broker will examine before recommending an IPO investment to a client are demand for the product, future prospects and the price/earnings ratio (P/E).

Demand for the product is down, despite a remarkably good product lineup. At the end of September, GM had sold 1.5 million vehicles, a year-over-year drop of 36 percent. The industry, meanwhile, dropped 27 percent. It is therefore difficult to argue that GM is on tap to pace the industry.

Future prospects depend in large measure on the future of the entire industry, which still looks gloomy. 

We don’t know what the New GM Company’s market capitalization is. Market cap is arrived at by multiplying the outstanding stock shares by the stock price. Since there are no shares and no price, we’re left wondering about the perceived value of the company.

Toyota‘s market cap is $135 billion, and there are discreet rumors among the New York investment community that the New GM IPO could be as large as $10 billion. Assume that the company issues 100 million shares at an offering price of $100 (equaling the $10 billion), those shares would have to rise by a factor of 13.5 to equal Toyota’s market cap.

But market cap does not matter as much as market share and profits. That is, will the new company work?

The U.S. government now owns 60.8 percent of the new GM; Canadian and Ontario governments together have 12 percent; the United Auto Workers health care trust fund owns 17.5 percent, and the remaining 10 percent is owned by unsecured creditors, mostly bondholders. These creditors also hold warrants for an additional 15 percent, which will probably come out of the government’s share. The percentages are approximate. 

The New GM board has almost no holdovers, and the company has a new chairman, former AT&T boss Ed Whitacre Jr., and an experienced president, Fritz Henderson. Whitacre and Henderson are capable men. As is Bob Lutz, the former product guru now in charge of marketing and advertising. But can they smite the side of the Renaissance Center and bring forth profits? Perhaps someday but with the automotive industry in the trough its in, and with the buying public nailing its collective billfold to the floor, the situation looks anything but festive.

I am admittedly skeptical of any entity controlled by the government turning a profit or even breaking even. It did not help my attitude when Ron Bloom, the Obama Administration’s car czar, told the 6th annual Distressed Investing Forum in 2008 that the free market system was “nonsense” and added, “We kinda agree with Mao. Political power comes largely from the barrel of a gun.” Do sentiments like those sound as if profits are high on the czar’s priority list?

And it doesn’t end there. Steve Rattner, the original car czar who helmed the bailout of GM and Chrysler, told Automotive News that he was astounded by the poor quality of management at the automakers. GM had “perhaps the weakest finance operation any of us had ever seen in a major company." He later elaborated on this theme in an article he wrote for Fortune.

GM would like to capture and hold about 19 percent of the U.S. market (its share was once as high as 54 percent), but some pundits, including Rattner, think that 16 percent might be more realistic. Whatever the share, the company’s ultimate profitability depends upon the size of the total market, which is now about 10 million vehicles per year as opposed to 16 million a couple of years ago.

If we believe that the New GM is leaner, more efficient, and better managed--and there are reasons to believe just that--I would suggest one financial number to watch before investing in the company. That number is revenue. If revenue is rising, there is hope. If revenue plummets, there isn’t.

Oversimplification perhaps, but it works for me.

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