Saturday, November 20, 2010


By Annaly Capital Management

Okay, so this wasn’t the exact headline after GM’s record setting capital raise this week. Including over-allotment option, the offering of common and preferred stock should bring the total dollars raised to $23 billion, making it the biggest IPO ever done. Of that amount, approximately $4.8 billion will be netted by the company, with the balance going to the selling stockholders, ie, the US Treasury. The use of proceeds of that $4.8 billion is to fund the company’s pension plans.

This $23 billion is a big headline number, and it is significant for the many things it represents, not least of which is the progress the company is making towards paying back the $49.5 billion it received as part of its bailout last year. But as we step back and look at the relative value decisions that are made by equity investors on behalf of themselves and their clients, we guess that most equity investors did not make their “buy” decision because they wanted to be an instrument by which taxpayer money is paid back or the company pension plan is replenished. Since virtually none of the capital raised is being handed to the company for investment in the car business itself (leaving aside for a moment the concept of fungibility), one thing it represents is a desire on the part of equity investors to put their capital (and their clients’ capital) into the fractional ownership of an American competitor in the global car industry. New CEO Daniel Akerson has a story to tell, and clearly his 80-odd investor meetings during the two-week road show worked to convince investors that this recapitalization is a step toward better things for the beleaguered carmaker.

There is a lot going on in the world today, and if investors were to think about all of it when making an investment decision they may simply choose to not get out of bed in the morning. There is a game-changing shift in the power structure in Washington DC, rising concerns in Europe over Irish contagion and draconian plans for budget cuts at the national, state and local levels. Just today, the head of the Federal Reserve gave a speech in Frankfurt in which he not only made a robust defense of monetary policy but also articulated—in blunt terms for a central banker—how he essentially had no choice because of the actions of policymakers at home and around the world. With this backdrop, to paraphrase from Casablanca, it doesn’t take much to see that the problems of what to do with $23 billion in equity capital doesn’t amount to a hill of beans in this crazy world.

But investors have to do something with their money, and those who bought (and held) in the GM deal may be right and they may be wrong about the future of GM, but everyone’s bet is now on the table. However, as we think of all the things that $23 billion could be used for, purposes that may go to more than just filling a hole in someone’s capital structure, we’d like to see this money go towards growing the US economy. At the end of the day, buying an ownership stake in GM today because it eventually will rebound, start hiring and investing and growing to earn a decent return for investors is just an economic transmission mechanism, just like QE2. And as the graph below shows, GM could be an ineffective one: It has been sinking in the sales tables for the past decade.


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