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Access to General Motors stock offering won't include many of its rescuers

Most Americans won't have access to the automaker's IPO shares, and many of those who will are likely to be well-heeled customers at big Wall Street firms.

November 16, 2010|By Walter Hamilton and Nathaniel Popper, Los Angeles Times

Reporting from Los Angeles and New York — General Motors Co. is set to reemerge as a public company this week in one of the year's hottest initial public stock offerings, but many American taxpayers who helped rescue the company won't be going along for the ride.

That's because most Americans won't have access to the new shares of the Detroit automaker. And many of those who do are likely to be well-heeled customers at big Wall Street firms.

The situation is not much of a surprise on Wall Street, where little guys often are shut out of deals, especially coveted ones where demand far outstrips supply and where fast-rising prices usually provide quick profits to anyone getting IPO shares.

But some experts said an opportunity to reward average Americans is being wasted, even though the Treasury Department said two months ago that individuals would have "ample opportunity" to participate in the IPO.

"Wall Street thumbed its nose at" individual investors, said David Menlow, president of research firm "We continue to help Wall Street out, and Wall Street seldom feels the need to say thank you."

Concern about small investors getting a piece of the action underscores the nation's outrage over the massive bailouts of banking and auto companies during the deepest recession since the Great Depression. Even the four major banking companies handling the IPO deal were bailed out by taxpayers.

The federal government put nearly $50 billion into GM to rescue it and usher it through Bankruptcy Court last year, ending up with a 61% ownership stake in the company.

On Thursday, when the offering goes public, the new owners are likely to include a wide swath of investors from large U.S. mutual funds to foreign entities, such as sovereign wealth funds and China's largest car company, SAIC Motor Corp.

The major underwriters are JPMorgan Chase & Co., Morgan Stanley, Bank of America Corp. and Citigroup Inc. — all of which received billions of taxpayer dollars to rescue them during the severe credit crunch in the recession.

In one twist from the ordinary IPO, a number of female- and minority-owned brokerages are involved in the deal. Among them are Loop Capital Markets in Chicago and Williams Capital Group in New York. Helping to market shares overseas are China International Capital Corp. and two Brazilian banks, Itau and Bradesco.

"There is just an inordinate amount of foreign companies in this considering this is taxpayer money," said Bill King, president of female-owned M. Ramsey King brokerage outside Chicago. He said his firm didn't receive the customary request for information from the Treasury Department asking it to participate.

The IPO is garnering such demand that underwriters reportedly are expected to boost the price of initial shares to more than $30 from the stated range of $26 to $29.

The automaker plans to sell 365 million shares, or roughly one-quarter of the company, in a deal currently worth about $10.6 billion.

The Treasury Department is expected to sell $7 billion to $8 billion of its holdings, reducing its position to as little as 43%. GM has repaid $7.4 billion to the government and agreed last month to repay an additional $2.1 billion by repurchasing preferred stock from the government once the IPO closes.

By some measures, individual investors could fare better than they normally do in coveted IPOs.

Underwriters are expected to allocate about 20% of the shares to so-called retail investors, more than the 15% that's normal in IPOs, said Scott Sweet, senior managing partner at IPO Boutique.

However, Sweet said, there were rumors last week that as much as 30% of the deal would go to individuals before demand rose among large institutional investors, forcing the retail amount to be scaled back.

Discount brokerage firms such as Charles Schwab Corp. and TD Ameritrade aren't getting shares to allocate to their customers. Those firms sometimes get IPO shares, though it varies from deal to deal.

"In general, the hotter the IPO the harder it is to get an allocation of shares," said Ram Subramaniam at TD Ameritrade. "We'd have loved to have gotten GM's IPO. We just don't have it."

Customers at full-service brokerage firms such as Smith Barney — a brokerage controlled by Morgan Stanley — will get GM shares. But full-service firms tend to cater to wealthier investors than discount firms.

And even at traditional brokerage firms, Sweet said, only a relative few individuals will get shares.

"The brokers are going to get far less than they could possibly place, and they're going to cherry-pick their best clients and reward them for their previous business," he said.

The Detroit automaker reported its third consecutive profitable quarter Wednesday and is on track to have its first full-year profit since 2004.

Bolstered by better sales and cost-cutting measures, GM earned $2 billion in the third quarter. Revenue rose to $34.1 billion, up 27% from the same quarter last year, which included nine days when the company was in bankruptcy.

From 2005 through 2009, the automaker had about $88 billion in losses.

Through the first 10 months of this year, GM said its sales rose 22% from a year earlier to more than 1.8 million vehicles after factoring out the Pontiac, Hummer, Saturn and Saab brands it closed or sold as part of its bankruptcy reorganization last year. That compares with a 10.6% gain for the auto industry overall this year.

Times staff writers Jim Puzzanghera and Jerry Hirsch contributed to this report.

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