GM's IPO May Hand Bankers Lowest Fees Since 1999

Wall Street bankers may be pushed to charge the lowest fees in at least a decade to arrange the Treasury’s sale of General Motors Co. in what could be the second-largest initial public offering in U.S. history.

Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley are vying to lead the automaker’s share sale, which may raise as much as $12 billion, an estimate by Independent International Investment Research Plc showed. The U.S. government may seek underwriting fees of as low as 2 percent, according to finance professors at Cornell University and Georgetown University. That’s less than any U.S. IPO over $5 billion since 1999, Bloomberg data show.

The Treasury, which owns a 61 percent stake in GM, will pressure the banks to accept fees that may be less than half the 5.5 percent average for all IPOs in the past decade after spending $150 billion in taxpayer money on the same financial firms during the credit crisis, the professors said. The underwriters would make as much as $360 million in an initial offering of GM based on the average 3 percent fee for past deals over $5 billion, data compiled by Bloomberg show.

“The last thing they need is the government putting hundreds of millions into the banks’ pockets,” said Roni Michaely, a finance professor at the Johnson Graduate School of Management at Cornell in Ithaca, New York. “Especially with the public scrutiny and anger over Wall Street.”

Michaely, who studies IPOs, said the banks may make fees of as low as 2 percent from underwriting GM’s share sale.

GM’s Bankruptcy

General Motors Corp. filed for Chapter 11 bankruptcy protection on June 1, 2009, after posting $88 billion of losses since 2004, the last year the company reported an annual profit. General Motors Co. emerged 39 days later as the government agreed to make a $50 billion investment.

Chief Executive Officer Ed Whitacre wants the Detroit-based automaker to sell shares this year as it seeks to trim the Treasury’s controlling interest and eventually free itself from government ownership, according to people familiar with the matter. The Treasury, which has about $40 billion tied up in GM’s equity, will probably have more say than the automaker in hiring a lead bank to underwrite the IPO, two people familiar with the matter said last month.

Treasury officials and GM met with senior executives from Charlotte, North Carolina-based Bank of America and New York- based Citigroup, Goldman Sachs, JPMorgan and Morgan Stanley in Washington last month about hiring a lead underwriter, one of the people said.

Lehman’s Collapse

Bankers pitching for the deal will be pressed by the government to lower their fees after facing public criticism for getting taxpayer bailouts and large bonuses as the economic crisis the banks helped create left more than 10 percent of U.S. workers without jobs, said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which manages $55 billion.

All five firms that met with Treasury and GM to discuss the IPO received taxpayer bailouts after the collapse of New York- based Lehman Brothers Holdings Inc. in September 2008.

Goldman Sachs took $10 billion from the Treasury, issued government-backed debt and gave up its status as an investment bank to gain access to cheaper funding from the Federal Reserve in 2008. The company, which is now being sued by the Securities and Exchange Commission for defrauding investors in subprime securities, paid its employees $10.9 billion in salaries and bonuses that same year.

‘Tough Negotiator’

“The government’s going to be a pretty tough negotiator,” said Ablin. “There’s going to be a lot of scrutiny on the fees. They’re certainly going to demand the best price possible.”

He said fees may range from 2 percent to 2.5 percent.

Andrea Rachman, a spokeswoman for Goldman Sachs, declined to comment, as did Brian Marchiony at JPMorgan, Morgan Stanley’s Mary Claire Delaney, John Yiannacopoulos of Bank of America and Citigroup’s Alexander Samuelson.

GM spokesman Selim Bingol declined to comment as did Mark Paustenbach, a spokesman for the Treasury.

The last time GM sold shares was in 1992, when it hired Morgan Stanley to underwrite the offer, according to data compiled by Bloomberg. Goldman Sachs managed Dearborn, Michigan- based Ford Motor Co.’s IPO in 1956. Former House Democratic leader Richard Gephardt, a consultant with Goldman, is a Ford board member.

The Treasury and GM may offer a 20 percent stake in the automaker, which is valued at about $60 billion, based on an initial estimate by Independent International Investment Research, a London-based firm that specializes in IPO valuation.

Valuations, Bonds

The forecast assumes a per-share profit of $8.26 in 2011, equity valued at 15 times earnings and 511 million shares outstanding, adjusted for an IPO discount, the firm said.

According to Eric Selle, a debt analyst at JPMorgan, GM’s equity may be worth $70 billion, based on a return of 47 cents on the dollar for holders of bonds issued by GM’s predecessor. The debt will be converted to stock and warrants in the IPO.

At current bond prices, GM’s implied equity value is about $48 billion, data compiled by Bloomberg show.

Ford, the only major U.S. automaker to avoid bankruptcy, has a capitalization of $38.2 billion, while Munich-based Bayerische Motoren Werke AG, the world’s biggest maker of luxury autos, is worth $28.8 billion.

Toyota Motor Corp., the world’s largest carmaker and based in Toyota City, Japan, is valued at $120.6 billion.

‘Another Twist’

“It’s not going to be a slam-dunk IPO,” said Reena Aggarwal, a finance professor at Georgetown in Washington who has studied IPOs for 20 years and projects fees of 2 percent to 3 percent for the GM deal. “A company like GM that has gone into bankruptcy, the government had to save it, and now it’s going to come out, adds another twist to the whole process.”

Based on Independent International Investment Research’s assumptions, GM’s initial offering would raise $12 billion, greater than the amount that all newly listed companies have sold in the U.S. this year and exceeding every American IPO except San Francisco-based Visa Inc.’s sale in 2008.

There were four U.S. IPOs of more than $5 billion since 1999 -- Visa’s $19.7 billion deal, AT&T Wireless Group’s $10.6 billion offering in 2000, the $8.68 billion IPO from Kraft Foods Inc. of Northfield, Illinois, in 2001, and United Parcel Service Inc.’s $5.47 billion sale in 1999, Bloomberg data show.

Underwriters garnered fees of 2.8 percent for Visa, equal to $550 million. Atlanta-based UPS’s deal generated fees of 3.5 percent, or $191 million, data compiled by Bloomberg show.

‘Huge Impact’

Based on the average 3 percent rate for the four deals, GM’s IPO would produce a $360 million payday. That’s double the combined $180 million that Goldman Sachs, JPMorgan and Morgan Stanley have earned in fees underwriting U.S. IPOs this year, according to Bloomberg data.

GM has suggested to Treasury an initial offering of 5 percent to 15 percent of the stock, a person familiar with the matter said.

“A deal of this magnitude has a huge impact on the banks’ league-table standings, which is going to be critical to how they fare,” said Anil Shivdasani, a finance professor at the Kenan-Flagler Business School of the University of North Carolina at Chapel Hill. “Most banks will compete pretty fiercely to be involved in the transaction.”

Some lawmakers say the government needs to push for lower fees without jeopardizing the success of the GM sale. The U.S. is paying Lazard Ltd. $500,000 a month as an adviser for the GM IPO, according to a document on the Treasury’s website.

‘Needlessly Wasting’

In India, the government is paying fees near zero for IPOs of state-owned companies. Underwriters for SJVN Ltd.’s $240 million deal last month were paid 0.48 percent to sell shares in the Shimla, Himachal Pradesh-based operator of India’s largest hydropower plant, Bloomberg data show.

“Treasury needs to drive a good bargain,” U.S. Senator Ted Kaufman, a Delaware Democrat, said in an e-mail. “They should negotiate an appropriate fee that ensures the success of the underwriting without needlessly wasting taxpayer dollars.”

GM reported $865 million in first-quarter profit last month versus a $5.98 billion loss a year earlier. The company also said last week that U.S. sales rose 17 percent in May, the first time it beat analysts’ estimates since January.

While GM’s earnings and vehicle sales may indicate the company is rebounding, underwriters hired by the government and the company will be responsible for drumming up enough demand from investors for an automaker that still has about $18.2 billion in debt and obligations.

The initial sale will also come after the European debt crisis spurred at least 26 companies worldwide to postpone or withdraw IPOs since the start of May, Bloomberg data show.

“By no means is this going to be an easy sale,” said Peter Jankovskis, who oversees $2.3 billion as co-chief investment officer at OakBrook Investments in Lisle, Illinois. “It’s going to take some salesmanship to get that IPO to come across. Going out, beating the bushes, getting willing buyers.”

To contact the reporters on this story: Lee Spears in New York at lspears3@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net; Michael Tsang in New York at mtsang1@bloomberg.net.

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.