Buffalo News, November 19, 2010, Friday

Buffalo News

November 19, 2010, Friday

Buffalo News

GM's new stock hits the road at full speed
Initial public offering may wind up ranking as largest in historyBy Matt Glynn and David Robinson

General Motors returned to public trading in robust fashion Thursday, following an initial public offering that raised more than $20 billion.

GM's stock closed at $34.19 on the New York Stock Exchange, after opening at $33 per share when GM CEO Daniel Akerson rang the opening bell. GM's initial stock offering could wind up as the largest in history.

The government, the largest seller of GM shares, hopes the sale will be the first step toward ultimately breaking even on last year's bailout. That would require the government to sell its remaining GM holdings for roughly $53 a share over the next several years.

Ron Bloom, the Obama administration's senior adviser for the auto industry, refused to predict whether taxpayers would get all the money back. "We're obviously eager to get the rest of it back as much as we can," he said.

President Obama said the early results validated his administration's $50 billion taxpayer-backed rescue of the automaker. "Today, one of the toughest tales of the recession took another big step toward becoming a success story," the president said after the first day of trading.

The government reduced its ownership stake in GM to 33 percent from 61 percent. The federal Treasury could end up unloading more than 400 million shares of the resurrected GM, which is smaller -- but cleansed of most of its debt. Some bankers have options to buy and resell more shares, which could raise total sales numbers.

In the stock offering, the government made $11.8 billion by selling 358 million shares at $33 apiece. It stands to make $13.6 billion if bankers exercise options for 54 million more.

GM's Wall Street reception contrasted starkly with the automaker's perils last year, marked by the government loans and a trip through bankruptcy.

"What a difference a year makes," said Brian G. Cannon, the managing director at Dopkins Wealth Management in Amherst. "You've got a 100-year-old company that went from riches to rags, and now, potentially, to riches again."

Cannon said the stock offering is a good sign for the overall stock market. "It really says a lot about the sentiment of investors today. It had a huge psychological and real effect on the market." The Dow Jones industrial average climbed 173 points, or 1.5 percent, Thursday.

Investors' response was also encouraging to Steve Finch, plant manager of GM's Town of Tonawanda engine plant.

"For me, personally, it's a long road that we've traveled," Finch said. "It's just a great feeling to have a company finally come out of this really difficult time and see some positive news."

Most individual investors were shut out of the actual IPO because big investment banks were granted the right to buy up most of the shares. So the first chance most individuals had to buy GM stock was once the shares actually started trading Thursday.

Despite high interest from sovereign wealth funds -- pools of money from reserves of foreign governments-- 90 percent or more of the shares were sold in North America, GM said.

At the market's close, GM shares had changed hands more than 456 million times, almost matching the number of shares sold in the IPO. Such volume is not unusual following a high-profile offering.

"Often the way the world is, the Wall Street institutions get in at the lower price, and the Main Street investor gets in at the higher price," said David Whitson, an auto equity analyst with Morningstar Inc. in Chicago.

GM has a major presence in the Buffalo Niagara region in its plants in the Town of Tonawanda and Lockport, not to mention suppliers and dealers. Its plants' high-wage payroll ripples through the local economy. But across the company, GM has gone through a wrenching overhaul, shuttering a number of plants, cutting brands and implementing a lower-wage tier for newly hired hourly workers.

Robert Coleman, shop chairman of Local 774, United Auto Workers, at the Tonawanda plant, said reaction to the IPO was reassuring. "It shows that GM turned around. You see the morale up with the people."

Last year, Coleman said, GM workers wondered whether the plant would survive and what that would mean for the community. Some older workers at the time made comparisons to the devastating loss of Bethlehem Steel operations in the early 1980s.

But this year, the Tonawanda plant was awarded two new engine lines set to begin production in 2012, investments representing $825 million. Preparations for those engine lines are under way.

Finch credits the good working relationship between plant and union management with keeping the facility on track. "I think that was a key determining factor in Tonawanda being part of the new GM," he said.

Arthur Wheaton, an automotive industry expert at Cornell University's School of Industrial and Labor Relations in Buffalo, said the stock sale helps GM improve its image and regain more autonomy. "I think they got a much bigger response than most people thought," he said.

That robust response, he said, also strengthens the public perception of GM as the automaker tries to sell more cars and trucks. Both of the region's GM plants are in a good position with the company as the "new GM" moves forward, Wheaton said.

Patrick Heraty, professor of business administration at Hilbert College, said two factors fueled the favorable response to the stock offering: the potential for growth in domestic auto sales as the economy improves and the relationships GM has built in China and India, which have become important overseas markets.

On the domestic front, Heraty said, GM will continue to face strong competition. "They still have to prove themselves, and I think it's going to take a while to earn that confidence."

How well GM's stock does in the future -- and whether it's a good investment or one to avoid -- depends largely on how each investor answers these two fundamental questions: How many cars can GM sell? And how much money can GM make doing it?

GM's financial position has certainly improved after the company slashed its debt burden through bankruptcy proceedings and won concessions from unions.

But car sales remain depressed, and GM is facing intense competition. "Don't confuse the familiar with the safe," said Cannon, who does not own any GM shares and recommends that individual investors who do buy it not to make it too big a part of their overall investments.

"There's a lot of risk in that stock," he said. "They're operating in a very competitive environment, and they've had one quarter of profits," earning $307 million during the third quarter.

David C. Hartzell, president of Cornell Capital Management, a Clarence money management firm, is a fan of Ford Motor Co. stock, but not GM shares.

"If I'm going to buy in the car market, I'm going to buy Ford," said Hartzell, whose firm has been trading Ford shares over the last six months. "It's a much better company. Ford has much better control over their labor costs. They have a much better product line."

"We think GM's management is weak. We don't like the product line as much," he said. "They've had trouble producing a product that the American public has wanted to buy on a consistent basis."

Beyond that, Hartzell worries that consumers will remain wary of buying GM vehicles because of the "Government Motors" stigma associated with GM as a result of its bankruptcy filing and government bailout.

News wire reports contributed to this report.

mglynn@buffnews.com and drobinson@buffnews.com