Uh-oh, here we go again. If there is one lesson we learned from the Great Recession it’s to beware of financial wizards promoting get-rich-quick schemes. And now we find General Motors at the center of yet another such scheme.
This one involves Harry Wilson, one of the key figures in the Obama Admin.’s Automotive Task Force that oversaw the bankruptcies of GM and Chrysler in 2009. Harry is nominating himself to the GM board, all with the idea of getting the company to cough up $8 billion to buy back stock with the dream of driving up the price. It might be laughable except that Wilson has the backing of four giant investment funds that own millions of shares. So he could have the votes to get on the board.
By the way, he’ll get a big, fat commission from the investment funds based on how much money he can shake out of GM. So don’t get the idea he’s doing this to protect the pensioners and widows who own GM stock.
Harry met with CEO Mary Barra at GM’s headquarters to tell her the company is holding onto too much cash and needs to give more of it back to shareholders. She must have coughed up her coffee.
Telling an automaker it holds too much cash is like telling an army going to war it has too much ammunition. If GM had this kind of war chest six years ago, it never would have gone bankrupt. Importantly, the Volkswagen Group has $6 billion more in cash than GM. Toyota has $11 billion more. They will use that money to out-invest GM in new products and new technology, pulling farther ahead of the car company that once was the largest in the world.
This is a cyclical industry and the U.S. market, on which GM is overly reliant for profits, will fall when the next down cycle hits – undoubtedly before this decade ends. More critically, the global economy is quite fragile and the geopolitical situation is downright scary. These facts alone should convince the GM board to maintain a fortress-like balance sheet, at least until it is sure the coast is clear.
Board members have a fiduciary responsibility, not just to shareholders, but to the corporate entity itself, which involves all the stakeholders. Singling out shareholders for a big payday is not being fair or responsible. The “old GM” spent billions buying back shares and kept doing so almost until it went bankrupt. Look how well that worked.
The confounding part of this ordeal is that Wilson helped figure out how to pour $50 billion of taxpayer money into saving GM, only to turn around and help his Wall Street pals get their mitts on a good chunk of that. The Obama Admin., which trumpeted “Bin Laden is dead and GM is alive” as the tag line of its re-election campaign, is notably quiet about Wilson’s money grab. It must be pretty embarrassing.
This is not GM’s first run-in with activist investors. In 2006, billionaire Kirk Kerkorian briefly bought 9.9% of the company and tried to force a number of initiatives.
Why is it that some people think they’re entitled to a company’s hard-earned cash? The usual argument is that as shareholders they are the true owners of the company. But true owners don’t act like that. True owners focus on the long-term viability of their company. And by long-term I mean for years to come, not the end of next quarter.
Back when the revered Alfred Sloan brilliantly ran GM, it was known as a Blue Chip investment. You bought GM because you knew it would provide steady returns, not instant riches.
Those investing in a mature, capital-intensive, industrial corporation are only fooling themselves if they expect sky-high returns. Unless, of course, they have the financial muscle to grab it by the ankles, turn it upside down, and shake out all the loose change they can grab. Let’s hope the GM board never lets this happen.
John McElroy is editorial director of Blue Sky Productions and producer of the “Autoline” PBS television show and “Autoline Daily,” the online video newscast.