On June 1, 2009, former corporate icon General Motors, a dominant player in the auto industry for nearly 100 years, declared bankruptcy. The new GM emerged from bankruptcy protection on July 10, 2009, with Ed Whitacre as its chairman. Last month, GM reported unexpectedly strong first-quarter results, boosting speculation that it may be positioned for an initial public offering (IPO) later this year. An IPO would enable the U.S. government, which currently owns 61% of GM through its $50 billion bailout of the company last year, to lower its stake in the automaker. If the government is selling its GM shares, should you be buying?

IN PICTURES: 20 Tools For Building Up Your Portfolio

The New GM is Leaner
The new GM is leaner than its predecessor in a number of ways. For starters, the company has halved the number of brands it is focusing on to four, from eight previously. The company is pitching its considerable weight behind Chevrolet, Buick, GMC and Cadillac, shutting down Saturn, Pontiac and Hummer, and selling Saab. The bankruptcy reorganization has also resulted in GM carrying a far lower amount of debt on its balance sheet.

In April, GM paid off the balance $5.8 billion of $8.4 billion in loans from the U.S. and Canada, leaving it with total debt of $18.2 billion. The old GM had a much bigger debt load of almost $95 billion. GM's employee count has also been reduced to 68,500, compared with 91,000 for the old GM. (The performance of GM can be used to predict the U.S. economy. Find out more in Economic Indicators To Know.)

And (Presumably) Meaner
The new GM decreased it customer incentive plans by approximately $230 per vehicle. For the quarter ended March 31, GM reported net income of $865 million, a huge improvement over the loss of almost $6 billion posted by the old GM a year ago. Revenue rose 40% from a year ago to $31.5 billion, as vehicle deliveries in the U.S. rose 17% to 475,000.

The company's North American and International Operations divisions each reported earnings before interest and taxes of $1.2 billion, offset by a loss of $500 million in the Europe division largely due to restructuring charges. The company also generated $1 billion in free cash flow in the quarter.

Old Habits Die Hard
It remains to be seen whether GM can sustain these numbers. As the company's vice-chairman and CFO Chris Liddell noted, the first-quarter results were helped by typically strong production at the beginning of the year. GM's first-quarter results may also have been temporarily boosted by Toyota's travails. (A product recall can decimate a stock in some cases, and have hardly any impact in others. Find out the difference in Recall Recoil: Will Toyota Recover?)

So has the new GM managed to get rid of the bloated wage-and-benefit structure that was such a massive drag on the company in the years leading up to the bankruptcy? A recent piece in the Wall Street Journal points out that GM has yet to realize savings from a provision that slashes pay by more than half - to $25.65 per hour for new factory workers, compared with about $60 for existing employees - in combined wages and benefits. According to the Wall Street Journal, that's because GM still has 5,000 laid-off workers who are first in line for any unionized jobs that the company adds, and they would be eligible to return to work at the higher pay scale.

As well, the primary reason for the old GM's problems in the first place was that it was unresponsive to its customers' requirements. Those unhappy customers abandoned GM in droves, resulting in GM's U.S. market share falling from 46% in 1980 to 20.3% by the first quarter of 2009. While the new GM has made a promising start, the jury is still out on whether the company can come up with exciting new cars that attract customers back to its showrooms.

History Says No
The historical evidence shows that few companies have managed to emerge from bankruptcy and succeed over the long haul. A prime example in the automobile sector is Chrysler, which in 1979 received $1.5 billion in government loan guarantees to stave off bankruptcy. The company staged a turnaround in the 1980s under the stewardship of CEO Lee Iacocca as it introduced innovative products like the minivan, but ran into trouble yet again following its merger with Daimler-Benz in the late 1990s.

On April 30, 2009, Chrysler filed for Chapter 11 bankruptcy protection. (Uncle Sam has saved Chrysler with money from taxpayers' pockets despite the fact that it failed the same test twice. Learn more in Chrysler Bailout 2009: Third Time's A Charm?)

The Bottom Line
GM's success ultimately depends on whether it has indeed turned over a new leaf, but it may take more than a few quarters for investors to assess if this truly is the case. As well, the success of the company's IPO will be determined by factors that are difficult to ascertain at present, including its timing, the state of the markets at that point, the offer price, and investor demand. Therefore, the best course of action for investors who are relatively risk-averse would be to stay on the sidelines as far as the IPO is concerned, since the success of the IPO in the short-term and that of GM in the long-term are far from assured.

Catch up on the latest financial news in Water Cooler Finance: Crying Over Spilled Oil, And Buffett Goes To Court.

Related Articles
  1. Home & Auto

    The Latest Airbag Recalls: What to Do

    The latest warnings are from Honda/Acura and Dodge. How to look up your car – and what to do if you find it on the recall list.
  2. Economics

    Does Big Money Hurt or Help Clinton and Rubio?

    Marco Rubio and Hillary Clinton lead their parties in raising money from Wall Street. Is that a help or a hindrance?
  3. Economics

    What is a Complement?

    A good or service that’s used in conjunction with another good or service is a complement.
  4. Stock Analysis

    Moderna Therapeutics: An IPO Candidate in 2016?

    Find out the reasons why 2016 may be the year when highly valued biotech company Moderna Therapeutic files for an initial public offering (IPO).
  5. Stock Analysis

    Domo Inc: An IPO Candidate in 2016?

    Learn about key information on Utah-based technology startup Domo Inc. and how the Domo dashboard differentiates itself in the world of business intelligence.
  6. Retirement

    Ipsy Review: Is It Worth It?

    Discover the history of ipsy, how much packages cost, options available for membership, major competition and what the future looks like for the company.
  7. Stock Analysis

    The Biggest Risks of Investing in Johnson & Johnson Stock (JNJ)

    Learn the largest risks to investing in Johnson & Johnson through fundamental analysis and other potential risks. Also discover how JNJ compares to its peers.
  8. Stock Analysis

    GoDaddy Inc: How It's Fared Since the 2015 IPO (GDDY)

    Evaluate GoDaddy's stock performance since its April 2015 IPO, and determine how you would have fared had you invested in the company on day six.
  9. Budgeting

    Craft Coffee Review: Is It Worth It?

    Learn more about one of the first and most flexible specialty-grade coffee subscription services on the market, a perfect fit for any coffee lover.
  10. Home & Auto

    What If They Can't Fix Your VW? (VLKAY)

    The latest news is that VW may not be able to fix the pollution controls to make those doctored cars meet U.S. environmental standards. Now what?
RELATED FAQS
  1. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  2. How does a cost-of-living adjustment (COLA) affect my salary?

    Some companies build salary adjustments into their compensation structures to offset the effects of inflation on their employees. ... Read Full Answer >>
  3. Where can you buy NetSpend reload packs?

    You can only purchase NetSpend reload packs at Giant Eagle, Albertsons, Roundy's and Pathmark supermarkets. NetSpend cards ... Read Full Answer >>
  4. When did Facebook go public? (FB)

    Facebook, Inc. (NASDAQ: FB) went public with its initial public offering (IPO) on May 18, 2012. With a peak market capitalization ... Read Full Answer >>
  5. Can your car insurance company check your driving record?

    While your auto insurance company cannot pull your full motor vehicle report, or MVR, it does pull a record summary that ... Read Full Answer >>
  6. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center