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). 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.
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