GM IPO Land Mines

GM logoIt would be easy to believe that the GM IPO is an opportunity to make easy money based on the reporting by television news networks. Themes such as allowing retail investors to “benefit” from the IPO imply that GM stock has no where to go but up.  However, under the surface of this optimistic appearance lurk some hazards.

A little research on the web uncovers some of the red flags potential investors in GM should be aware of. Rather than speculate on why it is a “Tale of Two Cities” when it comes to GM reporting by TV networks compared to the internet, let’s focus on one of the major warning signs that the outlook for GM may not be as rosy as expected.

General Motors admits on their S-1 SEC filing that its financial reporting may not be accurate. In GM’s words, “The lack of effective internal controls could materially adversely affect our financial condition and ability to carry out our business plan”.  A further review of GM’s balance sheet uncovers areas where the financial reporting land mine may detonate.

GM claims as assets on its balance sheet over $30 billion of goodwill.  That is a huge number! Assets are used to balance liabilities; there are tangible assets, such as cash, property and securities and there are non-tangible assets (which are harder to quantify), such as goodwill. Goodwill, in accounting terms, is the amount that an acquiring company pays for assets that is above the net tangible value of the asset.  During General Motors bankruptcy proceedings no competitive bids were sought for GM as it was pushed through a “quick rinse” 363 process. The claim by GM and the US Treasury (who orchestrated the bankruptcy) was that assets of Old GM were being purchased by New GM for an amount that exceeded their value. So, exactly how was the $30 billion of goodwill calculated?  This question hasn’t adequately been answered but once GM is trading publicly financial analysts will have the opportunity to probe further during earnings’ conference calls.

What else might come in to question regarding financial reporting?  How about cash flow and revenue recognition? It is easy to say you are making billions of dollars on paper, but how accurate are the numbers? On page f-31 of the S-1 GM states that revenue is recognized when vehicles are transported to dealers, not when sold to customers.  According to a opinion piece, GM has built up dealership inventories in the third quarter to spruce up their numbers. The quality of sales further erodes when you take in to consideration the high level of fleet sales thus far in 2010.

There will be other tough questions for GM to answer regarding financials in the future.  I am not a financial analyst, but the financial accounting issue has been raised by many others outside the television financial news networks. It would be wise for those looking to profit on the General Motors IPO to research all sources of news and opinions, including GM’s S-1 filing, before making investment decisions.