David Einhorn's controversial GM proposal is at least 2 years too late

Between General Motors’ management and board of directors and activist hedge fund Greenlight Capital, the battle lines have now been clearly drawn going into GM’s shareholder meeting early next month.

Greenlight’s David Einhorn, who controls 3.6% of the carmaker’s stock, has released an extensive proposal in which he lays out the case of dividing existing GM shares into two classes of stock — dividend and growth — to unlock value and address GM’s lacklustre market performance during a bull market and US auto sales boom.

Einhorn points to GM price-to-earnings ratio of 5.4x as the lowest in the S&P 500, rejects GM’s capital-allocation structure, and accuses GM’s management of misrepresenting his proposal to the ratings agencies. He also wants three seats on GM’s board.

GM calls Greenlight’s scheme “financial engineering” and insists that it would undermine GM’s investment-grade credit rating and create conflicting corporate governance issues.

Einhorn also took a whack at GM’s culture, calling it hidebound and dismissive of his proposal because the company didn’t think if it.

Smart but cynical

Greenlight’s proposal is actually somewhat cynical, even though Einhorn praises GM for having performance operationally at high levels since emerging from bankruptcy and staging an IPO in 2010. Indeed, the company has been steadily profitable and has raked in cash as SUV and pickup truck sales have surged. And GM has addressed the stalled-share-price issue by setting aside billions to undertake buybacks.

Einhorn seems to want to shove the dividend aspect of GM shareholding off to one side and perhaps watch as it withers, eventually consuming less of GM’s available cash. Meanwhile, the new “growth” shares would be the focus of all future buyback action.

It looks a lot like a capital raid because although Einhorn pays lip service to GM’s current and future business, he doesn’t pay much attention to how GM will grow its business over the next few years.

There’s no backing down on either side, so Greenlight’s proposal will live or die in June when shareholders vote. Death is the best bet, but Einhorn has to be hurting because just a few years ago, another activist investor, Harry Wilson, agitated for buybacks and got them.

Mary barraBill Pugliano/GettyGM CEO Mary Barra

Einhorn’s problem is timing. Wilson struck while the striking was good, before 2016 and 2017 when US auto sales reached new highs and GM shares had languished for five years. Back then, Einhorn’s quite clever plan would have perhaps earned some more respect. He might even have gotten a board seat.

But there’s no way GM is going to screw around with its cash cushion or credit rating ahead of an inevitable market downturn, which could begin in the next 12-18 months. And Einhorn has been so aggressive about the GM board that he’s probably offended many shareholders.

A buyback by another name

Fundamentally, if you think GM has upside, then you buy it now while it’s dirt cheap and wait for the downturn to shake out all the weakness in the market, enabling GM to enrich its US and global market share and outperform its peers. When sales pick back up, GM’s unrealized value will be vindicated and the actual business will have grown.

Some lofty market distractions may also have come down to earth by then, as well. If you aren’t sure what I mean, then here’s a hint: It begins with “T” and it ends with “A” and it now has a market cap that’s as big as GM’s and bigger than Ford’s. Also, its CEO tweets a lot and wants to retire on Mars.

The bottom line is that Einhorn waited too long to roll out his idea. GM learned something from the Wilson experience and had its defensive game completely prepared. Since he pulled the cover off his scheme, Einhorn has been defending, clarifying, and accusing rather than coming up with a compelling rationale for why the growth shares would capture value created by new products and services.

So all shareholders really have to go on is buybacks by a different name — which they’re already getting in additional to the dividend. That’s probably not enough to win them over to Einhorn’s side, certainly not with a cyclical downturn on the horizon.

This column does not necessarily reflect the opinion of Business Insider.

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This column does not necessarily reflect the opinion of Business Insider.

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