To: Professor KomissarovSubject: Current Events #5Date: May 3rd, 2011IPO LifesaverEarlier in 2010, General Motors Co. (GM) announced the filing of registration papers with SEC to hold an Initial Public Offering (IPO). An IPO is a company’s initial offering of stockto the public for purchase and trade on the stock market. GM has announced the filing with the SEC in order to try and reduce the 61% ownership that the United States government has in GM[CITATION Ter10 \l 1033 ]. If the IPO goes through, the government will not be able to regulate the management of GM anymore since the government’s share of GM would most likely drop below 51%. GM will offer both preferred and common stock if the SEC allows the IPO; the preferred with a fixed dividend rate and the common with no dividend anticipated [ CITATION Ter10 \l 1033 ]. A big question that arises with GM potentially offering an IPO is what will happen to the shares of stock offered after initial purchase by the public? In addition to this, whatis the significant difference between preferred shares of stock and common shares of stock? Finally, what kind of investors will the preferred stock attract over the common stock? To answerthese questions, let’s first explore the main difference between the two types of equity.Stock: Preferred vs. CommonPreferred stock is a type of equity that is very similar to debt. With preferred stock, shareholders are guaranteed a fixed dividend rate, but are not granted voting rights in the company. With a fixed dividend rate, the preferred stock is more likely to act like a bond due to the fact that a paid rate is guaranteed on the investment, and annual, semiannual, or quarterly dividend payments are distributed. In addition to this, preferred stock shareholders are also guaranteed claims on liquidated assets before common shareholders if the company were to go out of business. Lastly, most preferred shares have a conversion option that would allow conversion to common stock in the long-term. Future regulation may require preferred stock to be accounted for under liabilities in contrast to its current place under owner’s equity.Common stock is a type of equity that is better suited under the owner’s equity section of a balance sheet. No dividends are guaranteed to common stock shareholders, but voting rights are as well as pre-emptive rights (the right to purchase new shares issued by the company first). So what are investors looking for in GM’s IPO?Investor’s: Preferred vs. CommonPotential investors in GM are looking at multiple factors when analyzing whether to buy into the company if an IPO occurs, or if there are better investments out there. One of the factors in question is GM’s plan to not issue a dividend for common shares; unattractive when comparedto other companies who stocks fluctuate widely with economic trends1 (cyclical companies), yet still pay dividends on common shares [ CITATION Ter10 \l 1033 ]. One of the reasons that common shares may be purchased is to simply use the pre-emptive right to purchase newly issued preferred shares from GM in the future; preferred shares being the more demanded option 1 Definition of cyclical referenced from online dictionary: http://dictionary.reference.com/1due to the fixed dividend rate [ CITATION Ter10 \l 1033 ]. So what actually happened at the IPOand the price of shares after the IPO?OutcomeDoing some follow up research through the NYSE, I found the amount of money raised from GM’s IPO that occurred on November, 18 2010 amounted to 16 billion dollars.2 This number is right on with the anticipated earnings projected from GM before the IPO [ CITATION Ter10 \l 1033 ]. As far as the stock price per share, GM initially offered the stock at ~ $33/share and has only hit a ~$29/share low in April 2011 (see graph below). The relative consistency of the stock price, however, is hard to judge right now because of cyclical influences as well as the immaturity of GM’s stock as a public share. With the preferred stock listed as a mandatory convertible3 [ CITATION Ter10 \l 1033 ], the overall stability of the share and the new management of the company will be better analyzed in future quarters. Reference for image: http://www.nyse.com/about/listed/lcddata.html?ticker=gm&fq=D&ezd=1Y&index=52 Reference: http://www.nyse.com/events/1290078730626.html3 Must convert to common stock on a set