GM prospectus lays risks on the line

General Motors gave prospective investors much to mull over in its initialpublic offering prospectus on Wednesday, in which it outlined risks to its business.

These ranged from higher oil prices to aggressive competition in China and its naming of new executives with no previous motor industry experience.

The carmaker revealed on Wednesday that its US and international pension plans were more than $27bn in deficit at the end of 2009.

GM said in the document that its disclosure practices and internal control over financial reporting were “currently not effective” and could hurt its financial position and ability to do business in the future.

The US carmaker made the disclosure in the “risk factors” portion of its prospectus, required by US law for IPOs.

“Our US defined benefit pension plans are currently underfunded and our pension funding obligations may increase significantly due to weak performance of financial markets and [the] effect on plan assets,” GM said in its filing with the US Securities and Exchange Commission.

GM said its US defined benefit pension plans were underfunded by $17.1bn at the end of last year, and its non-US plans were underfunded by about $10.3bn.

“It’s not possible for us to predict what the economic environment will be at our next scheduled remeasurement as of December 31 2010,” GM said. “Accordingly, discount rates and plan assets may be considerably different than those at June 30, 2010.”

Among other risks GM cited was that the US Treasury, which owns nearly 61 per cent of the company, would continue to own a “substantial interest” in it after the offer.

“As a result of this stock ownership, the UST is able to exercise significant influence over our business if it elects to do so,” GM said.

The company also warned investors that it might not be able to qualify for federal funding for new vehicle technology programmes under a $25bn soft loan facility administered by the Department of Energy, under which GM’s competitors Ford Motor, Nissan, Tesla Motors, Fisker Automotive and Tenneco have received loans. GM said it had applied for a total of $14.4bn of the loans. “There can be no assurance that we will qualify for any remaining loans or receive any such loans even if we qualify.”

One of the company’s most startling disclosures was its admission that its internal controls were inadequate. “At December 31 2009, because of the inability to sufficiently test the effectiveness of remediated internal controls, we concluded that our internal control over financial reporting was not effective,” GM said. It said that until it was able to test the effectiveness of “remediated internal controls” over its disclosure practices, it might be unable to report its financial condition and results in a timely and accurate fashion.

GM will seek to persuade investors it is a sustainably viable company that has broken with the bad management practices of the past that led it to the brink of collapse during the financial crisis. After closing unproductive plants and marginal dealerships, axing four lossmaking brands, and cutting costs to match Asian competitors’, GM is able to turn a profit even at crisis-level car industry sales in the US of just over 11m vehicles a year, down from 17m before the crisis. It ended the second quarter with $32.5bn in cash.

However, it is still losing money in Europe, and last week got its fourth chief executive in less than two years when Ed Whitacre said he was stepping down.

Daniel Akerson, a former telecoms executive and managing director of Carlyle, the private equity group, will become CEO on July 1 and chairman by the end of the year. Mr Whitacre, who became GM’s chairman last July and its CEO in December, is credited with simplifying the business and bringing in recruits from other industries such as Chris Liddell, chief financial officer, formerly of Microsoft.

GM acknowledged the risk in using executives with “no outside automotive industry experience”. It said it expected they would “quickly adapt and excel” in their new roles. If they did not, “our business and financial results could be adversely affected”.