GM Stock Buy-Back Premature

American taxpayers are prematurely losing their stake in remaining General Motors ownership before the positive impact of the many impending redesigned GM products will have a chance to boost earnings and share price. 

Waiting another 18 to 24 months could reduce or eliminate the loss that will be taken on the original taxpayer investment that four years ago saved GM. 

Having recently arranged for an $11 billion line of credit, and with about $41 billion in available cash and credit, GM is buying the stock back directly from the U.S. Treasury Dept.

At least that is preferable to dumping the stock on the open market, thereby diluting the share value and causing the price to drop. That is this stockholder’s opinion, anyway. 

Steve Rattner, who led the government task force that oversaw GM’s recovery, describes the prospective buy-back as “welcome news.” He says it will erase the moniker “Government Motors,” a stigma that repelled many would-be buyers.

Others might say, GM has traded “Government Motors” for another appellation, “The Car Company on Which the Taxpayers Lost Billions.” Rattner himself estimates the loss at $14 billion. Other estimates are higher.    

Should taxpayers pay $14 billion to $20 billion when waiting 18 months would have given the stock the opportunity to rebound in a recovering economy and with an almost complete makeover of the product line? 

Not in my world.  I’m not a professional stock picker, but a Forbes article recommends “Roll with GM for 2013.”

Other investment experts have weighed in. Most have recommended buying GM stock for 2013, despite the attempt by some naysayers to float a rumor predicting a near-term GM bankruptcy. Of course, these columns appeared before the stock buyback announcement. And the naysayers ignored facts, while misinterpreting others, to create their false assertions.

Rattner says GM stock remains undervalued, trading at about seven times its projected 2013 earnings, compared with nearly 13 for the stock market in general.

Former GM CEO Ed Whitacre was shown the door after he claimed in a national TV ad that GM had repaid its government loans.

The commercial implied GM was no longer in hock to the government and U.S. taxpayers, which was certainly not true.  Some might argue GM is using taxpayer money to buy back taxpayer stock.  

What would another 18 to 24 months hurt? The president won reelection. What can the political pressure be? Why not give the stock the chance to improve? Is GM actually claiming a cap on compensation for an executive churn since the restructuring? 

Has the government been heavy-handed in its involvement with GM, except for ending private jet travel and capping executive compensation? Recalling the bailout of Chrysler in the 1980s, then-CEO Lee Iacocca chafed under the government supervision he had to live with during that era, especially the one that kept his jet grounded. 

Iacocca took a huge risk and paid the Feds off early. Iacocca put Chrysler at risk from a cash-position perspective, even though the gamble ultimately paid off. But he saved the truck division, which has been the largest source of profits for Chrysler since. And he got his jet back. 

So is it ego or legitimate business considerations driving this current GM stock buy-back move? 

I think it is ego and perhaps a tad of arrogance, a really bad sign. This is not in the best interests of the U.S. taxpayer. But this does not change the fact that while the GM and Chrysler restructurings were not perfectly conceived and executed, what was accomplished will be considered a feat by economic historians. 

The cost to have not restructured is incalculable. It would have been a lot higher than the $20 billion the government spent to rescue the auto industry. This premature stock buy-back unnecessarily tarnishes an otherwise laudatory endeavor.

David Ruggles is an auto consultant and former dealership general manager. He can be reached at [email protected].