•GM and Greenlight are heading for a proxy showdown over the GM board
•Greenlight Capital’s Einhorn has accused GM of misrepresenting his plan to ratings agencies
•GM has a history with financial schemes that have turned into disasters
A battle is shaping up between General Motors and activist hedge funder David Einhorn’s Greenlight Capital. Einhorn is urging shareholders to vote for a slate of three board candidates that he’s nominated, and last month he proposed that GM’s stock be split into two classes: one committed to paying a dividend, the other delivering growth.
Einhorn thinks the stock has severely underperformed the market during an epic sales boom for the US auto market.
By the numbers, he’s right: while the S&P 500 has surged since GM’s 2010 post-bankruptcy IPO, GM shares have moved up only about 5%, at a time when the company has notched years of profits, bolstered its balance, sheet, spent billion on stock buybacks and created a dividend yield of over 4%.
GM’s rejected the plan, but Einhorn isn’t backing down. In a recent letter to GM investors, he urged them to vote for Greenlight’s board slate, argued that the dual-stock structure could add upwards of 80% to GM’s valuation (current market cap: $US50 billion) — and accused GM of misrepresenting his proposal to the ratings agencies, which shot the idea down as being credit negative for the giant automaker.
“Unfortunately, GM has thus far rejected our Plan,” Einhorn wrote in Greenlight’s letter, dated May 3.
“Rather than giving our Plan a fair hearing, GM subverted our idea by modifying the Plan before giving it to the credit rating agencies to review. This has led the credit rating agencies to express undue concern about the impact of the Plan on creditors. In essence, GM’s management and Board are hiding behind a flawed credit rating agency process to avoid addressing the Company’s problem.”
GM denied that and in a response to Greenlight’s latest salvo, posted an extensive breakdown of Einhorn’s idea on its investor-relations website, insisting that the company “presented Greenlight’s idea to the rating agencies fully and fairly.”
Through this GM’s been pushing two words in its defence: financial engineering.
Given GM’s lousy history with spinoffs, financial engineering is a derided concept at the company’s headquarters in downtown Detroit. You could argue that the carmaker financially engineered itself into a bailout and bankruptcy in 2009. The “New GM” culture is adamant about not revisiting the mistakes of the past.
The term functions as a sort of dog whistle — a not-so-secretly coded message to investors that Einhorn’s idea is terrible, something that’s been tried before in other forms and has often undermined the company’s momentum.
What’s so bad about financial engineering?
The reason this comes up is the sluggish performance of GM’s stock, which runs counter to many fundamentals: the carmaker has been raking in money as its pickups and SUVs have sold robustly in the US, its cash position is solid, and the company just exited the troubled European market by selling its Opel/Vauxhall division to Peugeot for $US2 billion.
GM has also been investing in its future, buying Cruise Automation to enhance its self-driving efforts, creating Maven, a ride-sharing brand, investing $US500 million in Lyft, and launching the sub-$US30,000 Chevy Bolt long-range electric vehicles a full year ahead of Tesla’s Model 3.
But the stock hasn’t budged and that’s already drawn activist investors into the fray. The last round demanded a bigger buyback program — with GM granted them. It hasn’t’ worked to move the stock, though, and critics argue, also prevented the company from increasing the dividend.
“It’s an age-old problem,” said Peter Bible, the Chief Risk Officer and partner-in-charge of the Public Companies at EisnerAmper, an accounting firm — and Chief Accounting Officer at GM prior to the financial crisis. “How do you get more value out of GM stock?”
Bible said that the type of financial engineering that Einhorn wants “has been going on for a long long time,” citing the disastrous spinoff of parts maker Delphi in the late 1990s, which led to a 2005 bankruptcy and four years of restructuring, with an IPO in 2011. Throughout this period, GM pumped money into the company to keep it going and to satisfy pension obligations.
“Even if you did do something like what Einhorn recommended, it wouldn’t be the panacea that he thinks,” Bible said. “A lot of financial engineering has been tried.”
Old GM vs. New GM
Of course, given the situation with Wall Street — intensified by the rally in Tesla shares since the beginning of 2017, with the tiny, money-losing electric carmaker at points surpassing GM’s market cap — you could have seen Greenlight coming.
And while Einhorn’s initial proposal, the result of seven months of discussions with GM, was initially positive toward the company’s management, his May 3 letter represented a change in tone.
“We have engaged with GM management and the Board over the last seven months regarding the Plan,” he wrote.
“GM’s management has refused to work collaboratively with us. We have been disappointed by what we believe is management’s inaccurate and shallow analysis of the Plan, as well as their use of the informal credit rating agency process to subvert our Plan.”
GM management doesn’t want to fight a proxy battle with Einhorn, but it’s clearly prepared to do it. For every shot that Greenlight fires, GM returns fire with heavy artillery.
But that doesn’t the company isn’t frustrated that it’s dealing with its second activist attack in two years.
“The old adage is that if it isn’t broke. don’t fix it,” Bible said. “Things in the company have been going well. They have fought long and hard. The last thing they need is another shareholder battle.”