CAW Commentary on the GM IPO

GM’s $22 billion IPO got off to a roaring start last week. It’s ironic, needless to say, that it was underwritten by some of the same financiers (JP Morgan, Morgan Stanley, Citigroup, and Bank of America) who brought us the global financial crisis — the same crisis that pushed GM over the edge into bankruptcy protection! That just goes to prove, I suppose, that financial markets can make money on the way up, or on the way down; the only thing they can’t profit from is stationarity!

Another irony: Just as the U.S. and Canadian governments are reducing their stakes in GM (the company they saved), other governments are buying in: including China (through state-owned automaker SAIC) and a couple of mid-east sovereign wealth funds (including Kuwait’s). But our own officials continue to insist that it’s not their intention to be in the auto business for any longer than necessary, to get back as much of the bailout money as quickly as possible.

All the hype about the IPO in the financial pages, of course, doesn’t imply anything about what’s happening where real value is created: in factories and other workplaces, run by GM and hundreds of other companies. There, things have stabilized since the crisis, but not substantially rebounded. If North American auto sales continue to recover, GM is poised to make some impressively large profits. Not likely, however, that that will translate into much if any recovery in the company’s North American production employment (which is barely half where it was 5 years ago).

Here is a National Post commentary from CAW President Ken Lewenza regarding the IPO, calling it a positive development but urging the Canadian and Ontario governments to retain an equity share in the company long-term as a way of securing its presence in Canada:

A Good Investment for Canadians

By Ken Lewenza

            Last week’s initial public offering of shares in the new General Motors was a roaring success in financial terms.  The issue was oversubscribed, allowing the company to boost both the number of shares offered, and their price.  And then the share price climbed another 4 percent in its first day of trading.

            We learned long ago, however, that what’s good for General Motors is not necessarily good for the whole country.  So what does the IPO, and the resulting sell-off of a portion of government shares in the company, mean for taxpayers, for workers, and for Canada’s economy?  This is where we need to dig below the financial hype, and focus on what ultimately matters: GM’s real production, and the tens of thousands of Canadian jobs that directly and indirectly depend on this company.

            The successful IPO will contribute to the continuing repair of GM’s public reputation – not just with financiers, but with consumers.  It is clear that GM’s products (including Canadian-made successes like the Equinox, the Impala, and the Camaro) are hitting a chord with journalists and car-buyers alike.  The IPO further enhances public confidence that GM is here for the long-term, and that can only help sales down the road.

            Much commentary has focused on how quickly the governments that rescued GM will get their “money back.”  In Canada’s case, the company has repaid $1.3 billion in loans to the federal and Ontario governments, who will also reap over $1 billion from the IPO.  That’s about one-quarter of their stake in last year’s rescue.

            However, the financial return to governments is already much better than that.  First of all, the IPO has demonstrated that the governments’ remaining shares have legitimate value.  Following standard fair-value accounting procedures, both governments should book investment gains resulting from the IPO on their total shareholdings, not just on the shares they actually sold.  Every investor knows that you don’t have to sell something, in order to recognize its value.

            On that basis, Canadian governments have won back about 80 percent of what they put into the company: counting the repaid loans, the shares sold last week, and the market value of their remaining shares.  If GM shares appreciate another $10-12 (which is almost certain, if North American vehicle sales continue to gradually recover), then the governments will have recouped their investment.  If shares go even higher, then governments make a profit.

            But that does not constitute the totality of the government’s fiscal net benefit.  Remember, the goal of the rescue was to preserve 50,000 or more auto and related jobs (according to Finance Minister Jim Flaherty’s own budgetary estimates).  Those jobs were in jeopardy, at the gravest moment of the financial crisis.  The fact that 50,000 Canadians continued to work (and pay taxes), instead of collecting EI benefits, boosts the net fiscal position of the two governments by at least $2 billion per year.  So in economic and social terms, more than just financial terms, the rescue was both necessary and successful.

            Now that GM is getting back on its feet, governments should be in no rush to sell, for two reasons.  First, flooding the market too quickly with government shares would drive down their resale value.  But more importantly, there’s a sound economic case for preserving a government equity share in the long run.

            GM’s presence in Canada was reinforced through last year’s rescue effort, thanks to Ottawa’s success in negotiating a “Canadian manufacturing footprint.”  Canadians put up a share of the rescue money proportional to GM’s manufacturing activity here.  But in return, GM committed to maintaining that proportional share of production moving forward.  So long as Canadian plants remain productive and profitable (which they clearly are), this solidifies Canada’s auto industry to an extent that hasn’t prevailed since the Auto Pact.

            Home governments hold long-term equity stakes in many other automakers, such as Lower Saxony’s share of Volkswagen, or France’s holdings in Renault.  Japanese and Korean producers are similarly buttressed by long-term injections from national development banks and other public capital.  These public stakes do not prevent those companies from being global in scope, and innovative and flexible in their operations.  But they do keep these companies “grounded,” protecting a home base that continues to serve as the core of their operations.

            In Canada’s case, this is especially important since there are no automakers headquartered here; we are 100 percent dependent on decisions made in foreign head offices.  Maintaining a small but pivotal public ownership share in GM and Chrysler (whose Canadian operations are also vital) would help leverage and protect Canada’s foothold.

            Of course, free marketeers will howl about creeping socialism.  They are the same naysayers who denounced the rescue effort in the first place, arguing that government should let GM and Chrysler collapse (and counting on the free market to magically replace the lost jobs!).  In reality, government intervention not only saved both companies from extinction, it also laid the groundwork for a more stable (albeit smaller) Canadian automotive footprint moving forward.  Let’s learn from that lesson, and make sure we keep a fair share of this vital industry for decades to come.

Ken Lewenza is National President of the Canadian Auto Workers.