Tuesday Nov 16 2010, 2:55 am PST
GM's much-heralded IPO is receiving unusually negative media coverage just before it prices its deal tomorrow. It is rare for journalists to criticize an initial public offering during the "quite period" as the company going public is unable to defend itself because of SEC regulations. I keep telling IR guys: just work with the lawyers on the script and it’ll work out just fine. But it’s not common at all for the media to take shots and point out the obvious faults of a deal while its in registration (1).
It’s probably just as well the media acts like analysts and keeps their real opinions to themselves. Regular front page pessimism would probably bring the whole IPO system down. It’s easier to follow the last piece based on the story before that was based on some biased industry rag than to warn regular investors that most IPOs fail once institutional investors flip the stock to you and me.
The IPO of Tesla Motors comes to mind. That was a darn quick flip, courtesy of Goldman Sachs. But they aren’t leading the GM IPO, so it’s a pretty safe bet retail investors will be clocking profits for at least a quarter. Maybe even two.
NPR’s piece on the risks of e-trade investors buying into the IPO appeared just as GM announced it was upping the pricing range of the deal (2). You can bet Morgan Stanley built the retail demand in early, knowing that it had some room to move if someone was to point out that if the first day’s closing price wasn’t near the final offering price, it wouldn’t be fair to taxpayers.
And that’s what happened. The Wall Street Journal ran an article over the weekend that quite rightly pointed out that if "underpricing" occurs (common with most hyped IPOs), the government would be leaving money on the table at the implied expense of taxpayers who bailed out the troubled automaker in June 2009 (3). Underpricing, rather unintuitively, is when an IPO is bought by investors at a price that is far less than what the price of the newly-minted stock closes at after the first day of trading.
Underpricing is a tried and true method to entice retail investors to buy the new shares because, well, they might just keep going up and up and up. We’ve all been sucked in by this old chestnut. Who wants to miss out on the chance to own an IPO after it’s been trading only a week and is already up 25%?
Both NPR and The Wall Street Journal published stories while GM is marketing to investors during its roadshow.
The most famous example of a quiet period media event was the Google IPO when Playboy Magazine published an interview with the company’s top two executives (4). But that potentially disastrous situation was resolved rather quickly and did not delay the deal as Google's legal counsel was able to amend the IPO filing (S-1a) with the newly-disclosed information appearing in Playboy (4). I can tell you first hand that Google's IPO was a total debacle until Morgan Stanley saved the Wall Street noobs. Google isn’t such a noob anymore, though. I get a kick out of reading the passive advice of how Facebook should handle their IPO through weird “how we did our IPO” blogs by the google guys. Anyhow, I digress. Back to GM.
A more recent and salient example of media attention during the 'quiet period' didn't turn out quite so well. For some reason the executives of "The Film Department Holdings" upset someone so much that the LA Times ran a story about their IPO that was so negative - and at the worst possible time - that the company never made it to the trading floor.
The Film Department was doomed as soon as the savage (yet unchallenged) article was published at the start of the company's roadshow. It wouldn't have turned out so bad had the company adhered to Wall Street's ritualistic IPO marketing practice (they needed a steve yanor). But, like Google’s first attempt at a stupid auction they tried to do it their way and it was rejected. Everything from the presentation to the mid-stream underwriter change was a widely reported debacle. Schadenfreude will always be alive and well.
GM's IPO will be a success; you can be sure of that. In the next six months, major institutions will be selling shares to retail investors at higher and higher levels until their inventories of formerly owned government stock is sold to regular investors through pension plans, mutual funds and gals with e-trade accounts.
I'll refer you to Visa's IPO if you want to see how long it takes for institutions to transition stock to retail investors and the unhappy end result.
In Visa's case it took just a few months until...thud. Visa priced its IPO at $44 and closed its first day of trading at $64 in March 2008. And it soared ever upwards from there, hitting $82/share in June. But by October, it fell right back to where it was: $47. Ouch. Put that in your 401k and smoke it. It took over a year for Visa to come back after a lot of ordinary folks had already sold the stock at a loss to the very same broker they bought it from, swearing off that card in their wallet forever.
Some would say the Visa IPO was accurately priced, though, since it's low was the same as what the pros got in at.
We'll see if GM is the same situation. My guess is probably not. Only because Goldman isn't leading the IPO. With JPMorgan and Morgan Stanley as the leads, it'll take much longer for GM to fall back down to an appropriate valuation after it's touched the sky somewhere around $70 in March. But that's just an educated guess. You just never know what's going to happen. Ever.
If you care to watch GM's investor presentation which, at 10 minutes, is clearly dumb-downed for retail investors, you can check it out here: http://retailroadshow.com/roadshows.asp
GM is one IPO that will be fun to follow in the months to come.
-- The New York Nickel
Follow Jack on Twitter: @jackp27
1. NPR's advice to retail investors: http://m.npr.org/story/131328191?url=/2010/11/15/131328191/reasons-investors-may-want-to-sit-out-gm-s-ipo
2. GM ups the range: http://www.todayonline.com/Business/EDC101116-0000172/Upbeat-GM-ups-target-IPO-price
3. GM from banckruptcy to IPO: http://www.cbsnews.com/stories/2010/11/03/ap/business/main7020129.shtml
4. Playboy article on Google during GOOG's quiet period: http://www.google-watch.org/playboy.html
4. Media coverage much watched by Wall Street on GOOG's infraction: http://articles.sfgate.com/2004-08-14/business/17439728_1_ipo-auction-google-ipo-ipo-stock
6. LA times trashes the Film Department's IPO: http://latimesblogs.latimes.com/entertainmentnewsbuzz/2009/12/the-film-department-attempting-to-pay-debts-transform-business-with-public-stock-offering.html
7. Visa IPO prices deal: http://money.cnn.com/2008/03/18/news/companies/visa_ipo.fortune/index.htm
No one pays us to write this stuff. We do it for fun. But here’s what we know: nothing. So don't buy or sell anything based on what you read here. Tea leaves are a better bet. Or your dad. He knows better. Better yet, consult your grandma. Anyone other than us or your investment advisor. IPOs are risky if you don’t get in and out fast enough. Just look at Tesla Motors. Holy mackerel. That’s some OG Vancouver pump and dump. Word.