GM's Own Tuneup Is Working
Plenty of companies have benefited from activist shareholder proposals. But hedge-fund manager David Einhorn, bless his heart, is suggesting General Motors Co. undertake one of the silliest moves we can think of. Investors should thank CEO Mary Barra for shooting it down and rethink the situation at GM.
Shares of the Detroit automaker -- which sold about 17 percent of the vehicles bought in North America last year -- are saddled with a lower valuation than peers, which frustrates shareholders such as Einhorn given that GM has been proactive in improving profitability. It hasn't translated into stock gains, and for no clear reason.
Einhorn, the billionaire behind Greenlight Capital, thinks he has the fix: If only GM would tinker with its ownership structure by splitting into two classes of stock, then voila, returns! Matt Levine explained why this is delightfully terrible art. As far as activism goes, it's financial engineering at its worst. 1
Barra and the board get a corporate governance gold star for carefully evaluating the proposal before rejecting it. But the truth is, the type of changes she's been making at GM are what should bear real fruit for investors, such as parting with underperforming units and increasing profits. More of this and less paint-by-numbers.
GM shareholders just might come to appreciate the stock's steadiness should growth in the U.S. auto market slow as many analysts expect this year. If GM can sustain its renewed operational strength against this backdrop, then it's possible the share price will hold up better than peers since it already trades at a discount to them.
Barra might want to add improving GM's triple-B debt rating to her checklist, though. Bloomberg Intelligence analyst Joel Levington has pointed out that a commonality among GM's more valuable peers is that they have better credit quality, so improvement in that regard may be the key to unlocking value.
In a way, Einhorn's GM campaign perfectly sums up the state of shareholder activism these days. The rising ranks and notoriety of outspoken investors mean their demands are taken seriously even if the purported benefits are murky. For much of the past year, Greenlight Capital held a relatively modest outright position in GM shares of about 1 percent, according to data compiled by Bloomberg. And yet, whether by the force of Einhorn's name or a sense of compulsion on GM's part to demonstrate shareholder friendliness, Greenlight was able to get 15 direct meetings over seven months and a review of his proposal by three different investment banks. 2
But the crowded field of activists has already burned through a lot of the obvious targets, forcing would-be agitators to come up with more far-fetched, difficult schemes or to pick at the scabs of companies already targeted by others. Einhorn's GM proposal comes only two years after it acquiesced to another investor's demands for share buybacks. Campaigns for operational and financial improvement would be more productive. Even though activist funds can't profess to be experts in running, say, an automaker, they can put pressure on management to streamline or find new leadership. It's harder work than mere re-arranging, but would help activist investors shed their label as mere spin-masters.
Einhorn's run at GM was a miss. But the stock could still get its time in the sun. If anything, Einhorn has reminded people that Barra is already taking the right steps and simply deserves more credit from shareholders.
If the needless complexity of the idea wasn't enough, here's where the argument really unravels: Greenlight estimates the move could enhance GM's stock price by 20 percent to almost 70 percent from its current level. When spreadsheets spit out a range that wide, hit the X button and move on.
Greenlight's stake has since swelled to about 3.7 percent, not including a sizable options position, as of this week.
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Beth Williams at email@example.com