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Taxpayers Likely to Lose Money on GM's IPO

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On: Tue, Sep 7, 2010 at 9:16AM | By: Sherry Christiansen

Taxpayers Likely to Lose Money on GM's IPO

Financial analysts are predicting that the U.S. government has a very high chance of losing money on its investment in General Motors Co. in the very first offering of the automaker’s stock.  According to sources familiar with the preparation for General Motor’s IPO. Sources are saying that subsequent offerings may be more successful depending on how the stock is traded by investors.

The government may not see a break-even return on its $50 billion investment for years (possibly into the next presidential term), as the Treasury continues to sell its remaining stake in General Motors after the IPO.

A decision to price the initial GM shares below cost would be in line with the usual Wall Street practice of giving the first investors in a new stock a discount, but it could also help offset investor concern regarding the slow recovery of the U.S. economy and declining auto sales for 2010.

The projected market value of GM, according to analysts, is from $50 to $90 billion, based on estimates regarding GM’s future cash flow, and looking at the value of its closest competitor, Ford Motor Co., in addition to evaluating trading and bonds from the old General Motors.

GM needs to be able to realize at least $70 billion in order for the U.s. government to break even on the remaining investment of $43 billion owed by the automaker.
Given the fact that IPOs will usually discount stock by 10%-15%, and GM may have to discount even more in the current economy, it is possible that the taxpayers may not realize a break-even point from the initial public offering that is scheduled sometime after the congressional elections in November.

"You have to sell people on the notion that there is an upside to what they are buying," one of the sources said. According to one source, GM may be planning to discount as much as 20% of the stock at its IPO.

Preparations for the GM stock offering remain in the early stages, and will remain confidential with the securities and exchange commission, although many sources “cautioned that the size and value of the deal and the size of the stake to be sold by the U.S. government have not been determined and will not be set for weeks,” according to Automotive News.com.


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