Electric vehicle startup Tesla Motors’ $226 million IPO in June marked the first debut by a car maker on Wall Street since Ford Motor began public trading more than half a century ago. Now two months later, century-old Detroit automaker General Motors, having emerged from government-managed bankruptcy, is gearing up for an IPO of its own and is widely expected to file its prospectus with financial regulators this week for a planned IPO in the fall (shortly before its plug-in Chevy Volt goes on sale).
Despite the fact that GM earned $1.5 billion in its latest second quarter earnings — its biggest profit in six years – and Tesla isn’t expected to turn a profit at least until 2013, the bar for success will be much, much higher for GM than it was for Tesla, say analysts. Tesla’s IPO was all about hope for the future of electric vehicles and green car innovation from a Silicon Valley startup that fancies itself a technology developer akin to Apple or Google. GM’s IPO is about overcoming its long and recently tumultuous past, and about delivering a solid business as a manufacturing company.
Tesla vs. GM
Tesla generated tremendous excitement on Wall Street for its IPO and saw its share price leap more than 40 percent in the first day of trading — despite a history of zero profits and a large deficit. For GM, financials will carry much more weight with investors. “GM is more of a traditional manufacturing company,” J.D. Power and Associates Powertrain Analyst Mike Omotoso explained, “whereas Tesla was almost seen as a tech stock.”
That’s an image cultivated by Tesla CEO Elon Musk in his “road show” pitch to prospective investors leading up to the company’s public offering. Tesla is “closer to an Apple or a Google,” than to a GM or a Ford, he said, in terms of how the company operates. “I don’t think that’s something GM or Ford will be able to replicate ever.”
The perception of these two car companies as a tech innovator vs. a manufacturer sets up vastly different expectations for their public offerings, said Omotoso. “Traditional companies are expected to make a profit every quarter, while tech stocks are expected to lose initially then win big later on.” Plus, investors will be looking at GM’s “legacy of stock price performance (or lack thereof),” he said — an issue that 7-year-old Tesla didn’t have to deal with heading into its IPO.
“Tesla is riding high on hype as the new kid on the block that could change the world,” said Lux Research analyst Jacob Grose, “and its valuation after its IPO reflected that.” GM, by contrast, will sink or swim based more on hard numbers than future potential. “GM’s financials will be more important to their IPO,” said Grose, “because there is no ‘story’ to sell like Tesla has.”
GM IPO Success?
In May, GM reported a $1.07 billion profit for the first three months of this year, compared with a massive loss of $5.98 billion for that period in 2009. Last week, the automaker said its revenue during the second quarter of this year had risen to $33.2 billion, up 44 percent from the same period a year earlier, with second quarter net income climbing to $1.54 billion.
It’s a strong start, but will it be enough in a time when many companies are dropping or delaying IPO plans due to a rough market? “GM should perhaps wait for another quarter or two of profits before launching an IPO,” Omotoso commented, “but they want to do it now.”
With GM reportedly looking to raise $12 billion-$16 billion in the IPO, Omotoso said, “anything from $16 billion up would be considered a success.” Lux Research analyst Jacob Grose added, “After the depths to which GM has fallen, I think a successful IPO for GM would be one that comes close to paying back the U.S. taxpayers.”
GM’s IPO would enable the government to sell off some of its 61 percent stake in the company, acquired in exchange for a $50 billion loan as part of the company bailout last year. The Canadian government — which poured $9 billion into the automaker for a stake of around 12 percent — could also start to cash out. “There has been a lot of criticism of ‘Government Motors’ over the past year,” said Omotoso, “and an unsuccessful IPO would be a PR nightmare.”
Obligations to the government played a role in Tesla’s IPO, too, at a smaller scale. Federal and state governments have thrown significant weight behind the company as a beacon of green jobs and a new energy economy. The Obama Administration made a $465 million bet on Tesla (subject to certain benchmarks) through a Department of Energy (DOE) loan program, while California has approved an approximately $28.8 million tax break for the company through the state’s Alternative Energy and Advanced Transportation Financing Authority.
As part of its loan deal with the DOE, Tesla agreed to spend up to $33 million “plus any cost overruns” for its two DOE-backed projects (Model S and powertrain), and set aside half of the net proceeds from the IPO. Tesla was also obligated to direct half of the net proceeds from the IPO to an account dedicated to the projects, for costs that the feds will later reimburse.
Depending on whether Tesla ends up being able to deliver on its promise of cranking out electric cars for the masses, the venture could in time burnish or tarnish the reputations of state and federal programs that have supported the company, as well as larger efforts to promote clean cars and green jobs.
GM’s IPO, meanwhile, could lend Democrats and the Obama Administration a boost ahead of November elections, if the government is able to shrink its investment to a minority stake in the automaker. But if the IPO disappoints, Reuters notes, GM’s return to public trading poses a political risk for Obama, due to his role in making “taxpayers the largest shareholder in a risky market.”
At the end of the day, Tesla and GM are engaged in converse balancing acts. Tesla may be modeling itself after technology companies, but it’s working to become a large-scale auto manufacturer. And while GM has the legacy of one of the world’s oldest and largest car makers, it’s working to reinvent itself as a tech innovator. For both companies, an initial public offering is one step along the way toward the goal of building a business that thrive without government aid, as high-margin gas-guzzlers take an exit and a new generation of cleaner cars comes into play.
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Image courtesy of Jurvetson (flickr photostream).