General Motors Asked IPO Partners to Subsidize Sales of its Vehicles to Their Employees

When General Motors Company began accepting proposals from banks to manage its initial public offering last May Chief Executive Officer Ed Whitacre asked that they include a portion of their underwriting fees to subsidize the purchase of GM vehicles by their employees.

JPMorgan Chase and Company was awarded the lead mandate last month and agreed to accept as its fee, a mere 0.75% of the sale. That’s about one quarter the typical fees charged for such IPOs.

Automotive analyst Joe Phillippi of the AutoTrends consulting firm of Short Hills, New Jersey said, “That’s hardball. After beating them down on fees they want another pound of flesh. It does sound a little unusual.”

According to a document obtained by Bloomberg, contending banks were asked to consider “ideas as to how we can use the IPO to reposition GM and its vehicles within the investment community including your firm’s willingness to reinvest any portion of any underwriting fees into the purchase of GM vehicles for your employees and/or company use.”

Analysts say GM and the Treasury Department, which owns a 61% controlling stake in the automaker, wanted to keep bank fees low to conserve cash. The Obama administration also wanted to avoid any appearance of impropriety that might have resulted from paying high fees to Wall Street institutions which have recently received government bailout funds themselves.

According to a government document, GM was permitted to select the lead bank to handle its IPO, but the Treasury Department retained the power to veto its selection and also determined the fees the lead bank would be paid.

Instead of its nominal fee, JPMorgan Chase had initially offered to accept equity in GM in lieu of a cash payment, but the offer was rejected by both GM and the Treasury Department. Phillippi said that if the banks reinvested their fees in GM vehicles, as proposed by the automaker, their take would be even less.

Cornell University finance professor, Roni Michaely said business typically don’t ask investment banks to by their products or services. He conceded, however, that with fewer such deals being initiated, it’s not unheard of for businesses to make more requests.

In addition to asking that banks consider subsidizing the purchase of its vehicles, GM also requested that they discuss extending a multi-year revolving line of credit to the automaker.

Michaely said it boils down to supply and demand. “Wall Street always had the upper hand and charged extremely high fees,” he said. “Now there are many investment banks who want to do this deal. GM has leverage in this market.”

GM is expected to file a prospectus this month and to begin selling shares in November if market conditions are deemed to be right. According to two people familiar with the plan, GM will sell 20% of the Treasury Department’s stake in order to reduce its ownership to less than 50%.

The stock sale is expected to generate between $10 billion and $15 billion depending on a number of factors including the company’s performance, the overall health of the IPO market and U.S. economy at the time.

According to Bloomberg, only four U.S. initial public offerings have exceeded $5 billion since 1999. In 2008, Visa Incorporated’s IPO was worth $19.7 billion. In 2001, the UPS Incorporated deal was worth $5.47 billion. Kraft Foods Incorporated’s 2001 deal and AT&T Wireless Group’s 2000 offering were worth $8.68 billion and $10.6 billion respectively.

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