Ex-Obama adviser seeks seat on GM board to raise price
A former Obama administration auto adviser who helped engineer General Motors’ bankruptcy and bailout wants to join the automaker’s board — with the backing of four hedge funds — and convince the company to buy back $8 billion in shares.
Harry Wilson, who was a senior member of the auto task force that pushed GM into bankruptcy in 2009 as part of a $49.5 billion bailout, said he plans to seek election by shareholders to the board at the company’s 2015 annual meeting. He wants the automaker to repurchase $8 billion in stock by mid-2016. The effect of a buyback would be to boost the value of the remaining shares.
In an interview with The Detroit News Tuesday, Wilson said he thinks GM is holding on to way too much cash. He said that even with an $8 billion buyback, GM should still have $20 billion on hand by next year. He said the hedge funds are “prepared to take our case to where we need to,” but said it isn’t clear if GM will agree to appoint him to the board.
Wilson is working with four investment funds that support his election and proposal: Taconic Parties, Appaloosa Parties, HG Vora Parties and the Hayman Capital hedge fund founded by J. Kyle Bass. Together, they own approximately 34.4 million shares, or 2.1 percent of GM.
The shareholder challenge could prompt GM to reassess its strategy and pressure its management team to produce better results. GM CEO Mary Barra took leadership of the company in January 2014, and then quickly faced a crisis over the company’s delayed recall of 2.6 million vehicles now linked to 52 deaths. GM spent $2.8 billion on its record-setting recall of 30 million vehicles in 2014 — as much as it made in total profits.
Many investors have become impatient and complained about GM’s low stock price.
Wilson and the shareholders may already have had an impact. After the news broke, GM stock rose more than 4 percent to close at $37.52 a share Tuesday in heavy trading. It was the highest close since July 2014.
Wilson called Barra a “thoughtful and a good leader,” but said GM needs to move faster and be more aggressive to improve returns to shareholders. “I don’t think there is a need to change the team ... she is the right CEO and she has great long-term potential.”
GM said Wilson met with Barra Feb. 3 and told her of his interest in being named to the board — “a meeting requested by Mr. Wilson for other purposes,” the company said.
Wilson said the push for the board seat and share repurchase move announced Tuesday “is a direct result of shareholder frustration.”
One big question is whether other big investors — especially major institutional investors — will back Wilson’s bid to join the board. And it remains to be seen whether GM will agree to put him on the board without a fight. “I don’t know the answer,” Wilson said, saying he expects further talks with the automaker.
Some analysts are skeptical about a big buyback. GM nearly collapsed in 2008 after it ran out of money; it was rescued by a government bailout. Auto sales have been rising for five straight years — but the industry has historically had “bust-boom” cycles, and industry experts say manufacturers need a significant cushion to carry them through the bust periods.
S&P Capital IQ analyst Efraim Levy said in a note to investors that he does not expect Wilson to win a seat on GM’s board. But it may prod the company to move on shareholder concerns: “We view positively activist investor interest in GM as an accelerant for shareholder-friendly actions by the automaker.”
GM ended 2014 with $25.2 billion in cash, down from $27.9 billion at the end of 2013. Chief Financial Officer Chuck Stevens has said GM wants to protect its “fortress balance sheet” but also wants to return capital to shareholders.
In January, GM said it did not plan on raising its dividend. Then GM this month announced a 20 percent increase of its quarterly dividend to 36 cents per share. The dividend increase would be for the second quarter, pending board approval.
Wilson said the dividend increase came the day after he met with Barra — and soon after Barra had met with other GM investors around the World Economic Forum in Switzerland. “I just know that they totally flip-flopped in a three-week period,” he said. “That drives investors crazy — they don’t know what to expect.”
David Kudla, CEO and chief investment strategist at Mainstay Capital Management LLC in Grand Blanc, questioned whether GM should spend nearly one-third of its cash on a dividend just a few years of out of bankruptcy.
“They need to let GM leadership, let GM run the company, let them decide how to deploy capital,” he said. “These activists want to use financial engineering to enrich themselves by increasing the stock price in the short-term.”
Morningstar Inc. auto analyst David Whiston in an interview said he likes the idea of a share buyback, but says $8 billion in one year is too much for GM, given uncertainties such ignition switch recall litigation costs, unsettled Justice Department issues, and uncertainties in Russia and South America.
“This happens a lot when times are good,” Whiston said. “Activist investors demand a buyback … and the problem is those people don’t think about how much cash you’ve got to have in a recession.”
Biggest challenge since ’06
Wilson’s move is the biggest challenge to GM’s board and management since billionaire investor Kirk Kerkorian bought 9.9 percent of the company’s stock and tried to force an alliance with Renault-Nissan in 2006. Kerkorian’s investment arm, Tracinda, sold its stake in GM after the company’s board voted to end discussions. Kerkorian adviser Jerry York joined GM’s board and pushed GM to move faster to change its business model — and then resigned 10 months later.
The automaker faces big costs like a new union contract this summer and a potential Justice Department settlement — big unknowns for its balance sheet.
Officials say the company wants to have at least $20 billion on hand in order to maintain investment grade status from rating agencies. That’s to ensure that its GM Financial lending unit has access to low-interest funds.
Unlike the battle with Kerkorian, GM and Wilson are much less far apart. Kerkorian wanted to oust the CEO and essentially merge the company with Renault-Nissan. It’s also not clear Wilson would win a proxy fight to get on the board — a move that could be very expensive.
GM spokesman Dave Roman said Wilson met the deadline to be considered as a nominee for the board of directors. GM has not announced the date for its annual shareholder’s meeting or a location, but it typically is held in early June in Detroit.
GM’s board said it will review the proposal “and make a recommendation based on the best interests of all shareholders.”