|Deals of the Year|
It was the third-largest IPO ever listed on a U.S. exchange, according to Renaissance Capital LLC, and a windfall for a team of 35 banks led by Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc. that underwrote the automaker's offering.
"Given the steep hurdles facing the company, investors will look back on GM's successful turnaround as emblematic of America's struggle to get back on the road to economic prosperity," gushed Renaissance research analyst Paul Bard at the time.
The IPO understandably elicited significant attention, but it was a separate deal -- the automaker's much more controversial $3.5 billion purchase of AmeriCredit Corp., announced months prior to the offering -- that could prove more pivotal to the company's long-term success.
Detroit-based GM shed its in-house lending arm in 2006 when it ceded control of GMAC LLC to Cerberus Capital Management LP. The automaker had little choice at the time. It needed cash to fund the latest iteration of its restructuring and hoped to shield the lender from anticipated downgrades to GM's credit rating.
However, the move crippled GM's sales operations, leaving the automaker and its dealers at the mercy of third-party lenders, including the former GMAC (rechristened Ally Financial Inc. after its own government bailout), which were more reluctant to underwrite loans to less creditworthy buyers. Last summer GM estimated that at the time, 40% of U.S. buyers qualified as nonprime, yet the automaker got only 4% of its sales from that group. Presumably, a lot of those buyers were potential Chevy owners.
AmeriCredit presented a solution to GM's predicament. Though the purchase, which closed Oct. 1, was panned by critics who saw the automaker's past experiences in finance as a key contributor to its downfall, Detroit insiders say the move had broad support within the company. Sources say that GM CEO Ed Whitacre Jr. initially discussed reacquiring Ally, but personality clashes between Whitacre and Ally senior management, coupled with complications stemming from Ally's conversion to a bank holding company, made such a deal unworkable.
AmeriCredit may have been a consolation prize, but it could serve as a foundation for a broader return to lending by GM. AmeriCredit had been working with GM on subprime lending since September 2009, and it had built a base of 800,000 auto loan customers and $9 billion in auto receivables.
AmeriCredit's ability to extend credit to subprime borrowers made it a better partner for GM than Ally, but sources say the automaker could eventually revisit purchasing its former subsidiary should AmeriCredit prove its worth. New CEO Dan Akerson, a veteran dealmaker formerly with Carlyle Group, was evidently a proponent of buying Ally or another lender while serving on GM's post-bankruptcy board of directors.
A GM dealer called the AmeriCredit addition "a necessity," saying that without a captive finance unit, "regaining market share is going to be impossible -- period." And if GM is ever to come close to repaying the $50 billion it received from the U.S. government, it will need to increase that market share.
The U.S. Treasury, GM's majority shareholder until the IPO, took a loss on the $33 per share offering. To break even, the Treasury needed about a $44 per share price going into the offering. After the sale, the Treasury needs an average return of about $53 per share on its remaining shares to recoup its investment, meaning the stock needs to appreciate more than 40% from its current $37 per share price.
From a market point of view, 2010 was a landmark year for General Motors. It reversed four years of losses that totaled $80 billion with an expected full-year profit, and it completed both a successful IPO and a major acquisition. The success of the AmeriCredit deal could go a long way toward shaping the company's future growth and performance, and ultimately afford the Treasury a respectable exit.