General Motors evidently did a great job on their road show selling the new GM (GM) at $26-$29 a share. Lots of people, from individual investors like me to big institutions like China’s SAIC Motor, did their homework, concluded that GM shares were a bargain and lined up to get some.
I did get a small allocation when GM went public on Thursday, but not at the price I was led to expect. At the last minute, citing strong demand, GM jumped the price to $33, 14% above the high point of the earlier range and 27% above the bottom.
At the new offering price, GM shares were no longer as compelling. The price-to-earnings ratio based on last quarter’s earnings, 5.1 at $27 a share, jumped to 6.2; the price-to-sales ratio based on the last year’s sales rose from 0.3 to 0.4, the same as that of Ford (F). This pretty much wiped out the premium I expected to earn when GM started trading, and indeed, GM shares rose a meager $1.19 from their offering price Thursday, to just over $34 a share.
It may seem churlish to complain about a one-day 3.6% gain. GM never guaranteed that shares would be priced in the $26-$29 range, and I could have withdrawn my request for shares at the last minute as reports circulated that GM would price outside the range. Still, I feel like the victim of a sophisticated bait-and-switch, lured into the offering at a bargain price that turned out to be illusory. I expected better from both the new GM and the real party in interest here, which is the U.S. government.
After all, GM executives and Treasury officials had access to the same data I did when GM officials set out on a road show touting shares at $26-$29. They evidently felt they had to offer investors the chance of a bargain that compensated them for the considerable risks of investing in GM, many of them enumerated in the company’s proxy statement. GM has a long history of burning its shareholders. In my view, they and their underwriters should have set the expected range at $30-33 from the outset.
As a taxpayer rather than an investor, I suppose I should be pleased that the government is already recouping so much of the $49.5 billion it spent bailing out GM and cutting its stake to just 26% from 61%. But I also wonder if the last-minute price hike and sale of additional shares is in the government’s — and taxpayers’ — long-term best interests.
If the government had shown more patience, selling a smaller stake now at a lower price, and GM’s shares rose more sharply, the government might well have realized a greater gain on its entire stake down the road. After all, it paid an average price of $43.84 for its shares, The Wall Street Journal reported. In the Common Sense system, that’s called realizing a loss.
I hope the government keeps this in mind as it decides what to do with its other stakes, such as American International Group. The paltry gains on the GM offering aren’t going to inspire much investor enthusiasm.
To pay for my new GM shares, I sold the iShares MSCI Germany Index Fund (EWG), an exchange-traded fund I previously recommended. In June, the ETF’s shares were trading at about $20; they closed Thursday at $24.11, for a solid gain of 20%. For the same reasons I boosted my allocation to German equities, I now recommend reducing them: The euro is likely to rise given the Fed’s quantitative-easing campaign, making German exports less competitive.
The loud complaints from German elected officials about U.S. monetary policy echo this concern. Still, I feel many German companies remain well-positioned in the global economy — even if the dollar falls against the euro. I still own the other German-oriented funds I recommended.
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