Banks were competing fiercely to underwrite an offering that could be $10 billion to $20 billion, a person briefed on the matter said.
At that size, the deal would be the largest U.S. IPO since Visa Inc's (V.N) offering of $19.7 billion in March 2008, according to Thomson Reuters data, and one of the biggest U.S. offerings of all time.
The Treasury Department owns nearly 61 percent of the automaker's common shares after GM filed for bankruptcy last year. The automaker has since emerged from Chapter 11 protection and an IPO is a key step for GM to end its support from the government.
"The sooner they can get the government out of there the better," said Aaron Bragman, an analyst at research firm IHS Global Insight.
Analysts have estimated that the company could be worth more than $80 billion, which would leave taxpayers with a sizable paper profit.
The automaker's connection with the United States government has earned it the nickname "Government Motors" and cost it market share domestically among consumers who view it as a failed company, analysts say.
Morgan Stanley has been one of the government's key advisers in restructurings during the financial crisis. The bank advised the U.S. Treasury on Fannie Mae and Freddie Mac and is helping the government sell its remaining stake in Citigroup Inc (C.N).
The underwriting banks are expected to get about 0.75 percentage point of the deal in fees, the person briefed on the matter said.
That is relatively low. A typical fee for a smaller IPO is 7 percent, but multibillion-dollar deals usually carry fees closer to 3 or 3.5 percentage points, a banker said.
GM may also be looking for a line of credit, the person briefed in the matter said.
A banker said underwriters may be willing to accept lower-than-usual fees because taking a company such as GM public is seen as prestigious and underwriters hope to win future business from the automaker.
Morgan Stanley spokeswoman Mary Claire Delaney, GM spokesman Tom Wilkinson and JPMorgan spokesman Brian Marchiony declined to comment. A Treasury spokesman referred queries to the department's statement on Thursday.
SIZE IN FLUX
GM will choose the lead bankers for the IPO, but the Treasury has veto power over the selection and will determine the fees paid to underwriters, the Obama administration said on Thursday.
The government would retain the right to decide whether to participate and at what level.
The Treasury provided $50 billion of bankruptcy and bailout financing to GM last year. That rescue included $43 billion of cash and nearly $7 billion of direct loans.
GM repaid a $6.7 billion loan in April. The rest of the U.S. investment is an equity stake the government can start selling after GM launches an IPO.
GM has not said how big the IPO will be, but for taxpayers to be fully repaid the company must be valued at more than $70 billion. Last month, a JPMorgan debt analyst put GM's stock market value at nearly $90 billion. Ford Motor Co (F.N), in comparison, has a market capitalization of $38 billion.
The person briefed on the matter said the IPO could be as big as $20 billion if market demand is high, but cautioned the size is still in flux and would likely be closer to $10 billion.
With the U.S. stock market having dropped in recent weeks as Europe wrestles with a credit crunch, many initial public offerings have struggled to find buyers, forcing some companies to shelf IPO plans.
The timing of the GM offering is uncertain, but the Obama administration said it would not happen before the fourth quarter. Chief Executive Ed Whitacre has said an IPO is a possibility later this year or in 2011.
Bank of America, Citigroup, Goldman Sachs, JPMorgan and Morgan Stanley were all asked to pitch for the offering, the person briefed on the matter said.
Last month, the Treasury hired Lazard Ltd (LAZ.N) to advise it on a GM IPO. Under Treasury's 18-month contract with Lazard, the bank is being paid $500,000 a month until an IPO is completed.
In May, GM posted first-quarter profit of $865 million, surprising Wall Street, and said it might post its first full-year profit since 2004.
The Wall Street Journal was the first to report earlier on Friday that Morgan Stanley and JPMorgan were set to be the lead underwriters of the IPO.
Morgan Stanley shares closed 1.6 percent higher at $26, while JPMorgan was down 0.5 percent at $37.09, both on the New York Stock Exchange.
(Reporting by Clare Baldwin and Soyoung Kim; additional reporting by Jui Chakravorty and Paritosh Bansal in New York; editing by John Wallace, Steve Orlofsky and Andre Grenon)
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