Considering the routine abuses by Wall Street banks in underwriting IPOs, the GM offering is a real winner.
One of the great fears about the GM offering was that Wall Street would drastically underprice the shares, which is one of the investment banks' favorite practices. During the tech bubble, the shares of newcomers in networking, software and telecom routinely popped 200% to 300% at their debuts, handing the underwriters' prized clients the equivalent of risk-free money. Those clients, such as mutual and hedge funds, recycled much of those gains back to their benefactors, rewarding the firms with billions of dollars in inflated commissions.
At the time, the investment banks justified the practice by claiming that they were placing the shares in the hands of loyal, long-term investors. Today, we know better, even though the practice receded but didn't stop when the tech frenzy collapsed. In early 2008, the biggest IPO ever until Thursday––the Visa (V) offering––hit around $60 a share shortly after they went on sale, 36% higher than the offering price, giving the privileged funds overnight gains of $4 billion.
The big worry was that GM (GM) shares would soar far above the $33 that the underwriters sold them for, leaving government money on the table. If the stock had hit $44 today, as some analysts predicted, the Treasury would have sacrificed $4 billion, equal to 25% of the budget of the Department of Energy and 40% of annual appropriations for the EPA.
It didn't happen. As of mid-afternoon on Thursday, opening day, GM shares had appreciated just 5%, rising from $33 to $34.70. Note that it's also a stellar day for the market, led by other manufacturing stocks, including DuPont (DD) and Dow Chemical (DOW), which rose more than 2%. Given that its entire sector experienced a bump today, GM was underpriced by an extremely modest 2.5% to 3% at best.
So what did this IPO cost Uncle Sam? On the government's offering of 412 million shares that's harvesting $14.3 billion, the cost due to underpricing of shares is as little as $350 million. Add to that the amazingly low fees of just 0.75%, or $10 million for the government-owned portion, paid to underwriters such as Goldman Sachs (GS), JPMorgan (JPM) and Morgan Stanley (MS). That number is a pittance versus the 6% Wall Street likes to charge.
The best solution would have been a "Dutch Auction" that left no room for any significant first day increase, beyond the trend in the overall market. But considering the routine abuses in IPOs, this one is a winner. The U.S. Treasury obviously did a brilliant job of convincing the underwriters to keep raising the price to the original investors as demand strengthened in days before the IPO.
It almost certainly wasn't easy. Discounted IPO fees? Real market pricing that leaves minimal room for a "pop?" Sounds like a dream for America's young companies.
It may not last. But for now, let's raise a Thanksgiving toast to an IPO that truly protected shareholders who need a break -- America's taxpayers.
Also on Fortune.com:
LPL Financial IPO outpaces GM
Wagoner had to go, but did Rattner have to save GM?
GM IPO: We're No. 3!
There is no need having any investment bank for an IPO: The stock exchange give the new symbol for the new stock. Then everybody worldwide give his limited orders into the system, but no stock is available. When the unique seller find out that there are more waiting buy orders above his minimum price then the quantity that he has to sale, he give his big limited sell order: stock exchanges rules as after a trading stop...
"he best solution would have been a "Dutch Auction" that left no room for any significant first day increase, beyond the trend in the overall market."
What basis do you have for saying this? There have been hundreds of IPO auctions done around the world, and they have not priced shares accurately. Granted, the average first day return may seem relatively low, but the variance has been huge, with IPO auctions frequently getting the price either much too low or much too high.
Even for the few US IPO auctions, the mean has been low (if you leave out Andover) but the variance in outcomes is large.
GM could have changed US IPOs by adopting the standard method used around the world - a hybrid, using the US book building method to price the shares, but using a public offer tranche to allow all retail investors to participate in an open, transparent way. Nearly every country except the US allows retail investors to order shares in IPOs in this even-handed, above-board manner. When are we going to try it?
A rare win for Washington? What would you consider a loss?
The sale price for government shares should have been well into the 40s to make the remainder of the share being sold at a reasonable price. I belive the remaining share have to be sold at near $60, possible but not likely.
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