DETROIT — General Motors has agreed to buy back $5 billion of its shares and Harry Wilson will withdraw his bid for a seat on the company’s board on behalf of four hedge funds.
“We will continue to invest in innovative technologies and world-class vehicles that will deliver sustained, profitable growth and maximize returns to shareholders.” GM CEO Mary Barra said. “This is the right framework for the company.”
The agreement settles a major challenge from a group of GM’s largest investors who argued that the company’s stock was undervalued given the strength of the North American and Chinese auto markets. They also contended that the $25.2 billion in cash that GM held at the end of 2014 was more than it needed.
The compromise also avoids what could have been a contentious proxy fight that would have diverted GM’s attention at a time it is trying to restore its troubled European business to profitability, and put last year’s record level of recalls behind it.
Ken Feinberg and his team of disaster compensation experts continue to review applications from people whose injuries may have been caused by defective GM ignition switches. GM has estimated that compensation program will cost between $400 million and $600 million.
The Department of Justice is investigating whether GM was criminally liable for not recalling sooner about 2.5 million vehicles with the defective ignition switches.
Those issues did not prevent GM from responding to the pressure from Wilson and the four hedge funds. Coupled with a previously announced increase in its quarterly dividend from 30 to 36 cents per share, the agreement with Wilson and the four hedge means GM will distribute $10 billion to its shareholders between now and the end of 2016.
Wilson, a former adviser to President Barack Obama’s auto task force that shepherded GM through its 2009 bankruptcy, nominated himself last month for a seat on GM’s board. He was acting on behalf of four hedge funds who argued that GM stock was undervalued.
The hedge funds are Taconic Capital Management, Appaloosa Capital Management, HG Vora and the Hayman Capital. Together, they hold about 34 million shares of GM or a 2.1 percent stake.
“We have arrived at a win-win outcome that includes a thoughtful approach to critical capital allocation issues and other important measures to increase long-term shareholder value,” Wilson said.
The agreement was hammered out over the weekend. Talks may have become more urgent after Warren Buffett, another large GM shareholder, said he disagreed with the idea of putting someone on the board who stood to make a percentage of the increase in “other people’s” shares, a reference to the way Wilson is to be compensated for his role as leading the charge of the four funds.
Wilson responded by saying he has owned GM shares since 2011, was willing to take his compensation in the form of more GM stock and would commit to holding shares for an extensive period of time.
GM will begin the buyback immediately and complete it by the end of 2016.
Despite paying $5 billion to shareholders, GM will maintain its previously stated plan to spend $9 billion this year on capital improvements. But it agreed to disclose each quarter its return on invested capital, in short what it’s achieving for that level of spending.
But Moody’s Investors Service’s Bruce Clark said the buyback “will likely delay any potential consideration for an upgrade in GM’s credit rating.” Moody’s is maintaining its stable outlook for GM’s credit rating.
“GM is committing itself to a large shareholder reward initiative when its metrics are being pressured by the recall,” Moody’s said in a statement. “It’s going to take some time to re-establish the operating and financial cushion that might support any improvement in the rating.”
The automaker said it remains on track to reach a 10 percent profit margin on its North American business in 2016, and to earn between 9 percent and 10 percent margins worldwide by early next decade.
Chuck Stevens, GM chief financial officer, said the company has planned on maintaining between $20 billion and $25 billion of cash.
“We’re just moving to the low end of that range,” Stevens said.
While Wilson and the hedge funds were seeking a $8 billion stock buyback, most activist investors will regard this as a win.
“They banged on GM’s door, mumbled ‘trick or treat,’ and got two handfuls of candy,” said Erik Gordon, professor at the University of Michigan Ross School of Business. “They are skipping off to the next house.”
But Barra and GM executives also stand to gain because 87 percent of their compensation is tied to the company’s stock price. That is substantially higher than it was in the four years immediately after GM emerged from bankruptcy. Executive pay was subject to review by the U.S. Treasury, which was a major shareholder.
