NEW YORK (
is anxious to lose the moniker "Government Motors" and the first step on that road is raising capital to start buying back the government's stake.
Unfortunately, it's not as simple as just launching an IPO and waiting for the money to roll in. Linda Killian, the principal and portfolio Manager of the Renaissance Capital's IPO Fund, says it's more important to have a successful IPO; not just an IPO for the sake of repaying the owners.
Companies like to have strong quarter before heading into IPO territory and GM is no different. The auto maker delivered an impressive second quarter earlier this week, posting a profit of $1.3 billion with revenues rising 44%. GM went from closing plants to running them full force.
So if the speculation that the company will shortly be filing for the IPO is accurate, it looks like its timing is great. However GM needs more than good timing to have a good offering. Killian outlined four points related to what she thinks it will take for the company to launch the biggest IPO in U.S. history as well as the most successful one.
GM will have to show its cards to the market and divulge the details of its product mix. How much of its sales are profitable SUV's versus government subsidized and not-so-profitable electric cars? The strategy will have to be spelled out for everyone to see.
Details about executive compensation will also be scrutinized. Killian thinks that when some executive pay details are revealed, bankers won't look so overpaid. The company has to fully disclose to potential investors any material issues that may not be public now. This information could stall the offering if the public is shocked by what it reads.
3. IPO Allocation Transparency
Renaissance Capital knows better than most that the IPO allocation system leaves a lot to be desired. FINRA has proposed a rule requiring underwriters to report to issuers the final allocation of shares. Renaissance Capital thinks GM should disclose all allocation information to the public as well.
There have been some grass roots attempts to have a "Google-like" Dutch auction for GM. The argument is that since the taxpayer bailed out GM, a populist type of auction is the way to go.
But Killian points out, "People wanted to buy Google, there may not be enough demand to meet the size of this offering." She advises leaving it to the bankers to sell this stock, because in her opinion, "It could be a hard sell."
2. Define the Players' Roles
"There are many competing interests in this company and with a successful IPO, you want all of interests of management and the board aligned," says Killian. She wonders how the United Auto Workers union fits in with a new GM.
Then she highlights the Obama appointees to the board. Is their allegiance to the administration or to the company and its shareholders? Then there's the majority owner -- The Treasury. The Treasury was criticized by the TARP Special Inspector General for closing 26% of the dealerships, calling it an "ill-considered decision that resulted in significant job loss in the midst of a recession."
The Treasury has micromanaged GM and new investors may not be so comfortable with Treasury officials making vehicle decisions. Killian says it's critical that GM make it clear who is calling the shots and clearly define each participant's role in the company.
1. Value the Stock for Success
Killian points out that it is critical for new shareholders to make money on the IPO. "An IPO that trades below its offer price becomes a broken stock, avoided by investors," said Killian.
Renaissance Capital wrote that: "Over the past two years between 50% and 70% of private equity IPOs have been forced to price below the originally proposed ranges." She is looking at
as a rough benchmark, although she notes Ford is in much better shape, so GM would need to be priced below Ford.
GM will need to keep realistic expectations on what price its stock will bring. At the end of the day, the company is still a debt heavy private company whose backers want to monetize their investment and potential shareholders will only want it at the right price.
Written by Debra Borchardt in New York.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.