On Monday, General Motors announced that it gave the green light to a $5 billion share buyback plan, which would be running until the end of next year. The announcement is the result of an in-house agreement to put an end to an ongoing proxy fight.
The company also reported that the value of the stock involved in the buyback program was negotiated with Harry J. Wilson and a group of hedge fund managers which own about two percent of the company. Mr. Wilson, 43, is one of GM’s most significant shareholders since in 2009 he had saved the company from bankruptcy as a member of the governmental task force that restructured it.
In February, Mr. Wilson asked the company to start an $8 billion share buyback program, while he also announced that he was planning on nominating himself for the board this summer. Seemingly, the company and its high-profile investor reached an agreement since Mr. Wilson withdrew its candidacy for the board of directors.
The move announced Monday is part of a deal with Harry Wilson, a former member of the government task force that restructured GM coming out of its 2009 bankruptcy. In exchange, Wilson agreed to withdraw his hostile candidacy for the Detroit automaker’s board of directors.
GM’s ‘safety net’
One month ago, Mr. Wilson accused the Detroit automaker that it was hoarding money, rather than give it back to the rightful owners – investors. On the other hand, the company replied to Mr. Wilson’s accusations regarding overcapitalization by saying that it was creating a “safety net.”
General Motors reported a capitalization of $25.2 billion in cash at the end of last year, while its current goal is to maintain a $20 billion cash balance. The company also said Monday that the share repurchase is set to start at once and last until the end of 2016.
During Monday’s premarket hours, GM shares rose by 2 percent to $37.85 – a sign that shareholders greatly enjoyed the announcement.
According to the company’s chief executive Mary Bara, the negotiations with Mr. Wilson and his supporters lasted for about two weeks and ended this weekend when an agreement was finally reached. Ms. Barra didn’t provide any other details including on whether Mr. Wilson’s group was resistant to a smaller value of the stock buyback program. She only said that other shareholders were content with the current buyback plan.
On Monday, Ms. Barra also underlined that her company was “on the path” to buyback the shares anyway, so it wasn’t just Mr. Wilson’s achievement.
Last month, the company announced that the shareholders would see further returns for the second half of the year since the Q4 and annual earnings report revealed a 20 percent increase in dividends. Chuck Stevens, GM’s Chief Financial Officer, said in February that the returns and the share repurchases would cost the automaker $10 billion by next year’s end.
CFO Stevens stated Monday that the $20 billion cash “safety net” is designed to cover the costs of the recall of ignition switches in many of its vehicles including Saturn ION, Chevrolet Cobalt and HHR, Pontiac and Saturn Sky, as well as to withstand other unpredictable downturns.
GM is currently under the scrutiny of the Justice Department for failing to disclose a potentially deadly flaw in the ignition switches of some of its small cars. That could result in more than $1 billion penalty and additional payments to the people killed or injured and their families. The company estimated the monetary compensations to $400 million, but it is prepared to pay as much as $600 million if it is necessary.
A $8 billion buyback plan was maybe too much
Additionally, Mr. Stevens explained Monday that the company’s goal was a $20-25 billion cash reserve, but due to cost cuts GM could expand those numbers even further. He also said that his company would return money to its investors every year, while the share buyback plans would be announced each January. Mr. Stevens even mentioned that $9 billion would be invested in the GM’s plans of releasing more cars over the next years.
On February 9, Harry Wilson announced its board candidacy in a letter addressed to the chief executive. He was backed by four hedge funds which currently own 34.4 million shares which account for about 2.1 percent of the company. According to the deal’s details, Mr. Wilson would receive 4 percent of any the profits made on GM shares.
But on Monday, he said he was surprised by the GM’s quick response to his group’s demands.
“It’s rare in these situations that companies listen as well and are as responsive. They did it in a very complete package. We basically said thank you,”
he also said.
He acknowledged that a $8 billion share buyback plan would have been unrealistic since the automotive industry is “very cyclical” so a lot of things could escape the management’s control.
Analysts currently suggest that the Wilson deal is a win-win outcome since it will attract even more stock buyers, while also allowing GM to invest more in the business and cover any penalty and unexpected costs.