THE WALL STREET
GM Sets Buyback, Placating Activists
largest car maker is latest to feel pressure by hedge funds
critical of management spending
GM Chief Executive Mary Barra agreed to a $5 billion share
buyback and spending on dividends amid pressures from prominent
investors, balancing the auto maker’s need to boost spending on
new vehicles and maintain its investment grade rating. PHOTO: BLOOMBERG NEWS
Vipal Monga and
Updated March 9, 2015 10:22 p.m. ET
Co. on Monday became the latest company to return
billions of dollars to shareholders amid tussles with investors over
how to better allocate corporate cash.
Facing a potentially
contentious fight over a board seat and a larger buyback, the car
maker tried to walk the line between placating big investors and
spending more on its future.
GM disclosed a $5 billion
stock repurchase, a sum that comes on top of a previously announced
dividend increase, and an additional $9 billion it will spend this
year to improve brands including Cadillac, boost fuel efficiency and
develop electric and driverless cars, among other things.
GM’s decision highlights a
dilemma facing many companies as activists cement their toehold in
boardrooms: Who is better at determining the appropriate use of cash
as corporate balances grow?
Some data suggest
activists discourage companies from investing in their businesses,
something many activists would readily admit, citing wasteful
Companies in the S&P 500
targeted by activists between 2003 and 2013 reduced their spending on
plants, equipment and research to 29% of their cash from operations in
the five years after activists bought their shares from a median of
42%, according to an analysis conducted for The Wall Street Journal by
S&P Capital IQ’s Quantamental Research unit.
That compares with the
much smaller drop to 25% from 27% for nontargeted companies over the
targeted by activists boosted dividends and stock repurchases to a
median of 37% of operating cash flow in the first year after being
approached by activists, from 22%. S&P 500 companies that weren’t
targeted by activists showed a 10-point increase, to 36%.
“Companies only have a
finite amount of cash,” said David Pope, a managing director at S&P
Capital IQ. “If they spend it on shareholder returns, there is less
cash to spend on everything else.”
GM made its buyback
decision after top officials determined its $25 billion in cash was
more than enough to fulfill spending plans and handle uncertainties
like the federal investigation into a botched ignition-switch recall.
People familiar with the decision said a buyback already was under
consideration and investor talks sped it up.
‘Companies have a finite amount of cash...’
—David Pope, S&P Capital IQ
“We believe an initial $5
billion share buyback is good for our owners because we cannot earn
better returns by investing that cash in the business at this time,”
GM finance chief Chuck Stevens said on a conference call.
Separately, on Tuesday,
some large investors and corporate chiefs are gathering in New York to
debate the social and economic impact of rising shareholder pressure.
The nation’s largest auto
maker had come under fire from Harry Wilson, a former architect of
GM’s federal bailout, who wanted an $8 billion buyback and had the
backing of four hedge funds in his bid to get a seat on the company’s
“Capital allocation is an
underappreciated discipline,” Mr. Wilson said in an interview on
“When activism works well,
one of the things it does is try to create a disciplined framework
around this decision.”
GM had said last month
that it would discuss more capital returns later this year.
The company was waiting
for clarity around any fine the Justice Department might levy as well
as other litigation that may result from a massive recall due to
faulty ignition switches, the people said.
Mr. Wilson and the funds
have dropped the request for a board seat in light of the buyback and
GM’s pledge to better explain its spending and goals.
GM stock rose 3.1% to
$37.66 in 4 p.m. New York Stock Exchange trading on Monday.
Not all investors were
excited. James Potkul, a Parsippany, N.J., investment manager who
controls about 10,000 GM shares, said the auto maker should instead
marshal its cash to protect against uncertainties. “Are they worried
about a downturn? They should be,” he said. “These companies can burn
cash pretty badly when a downturn comes.”
How and when to use
capital will be the topic of debate when the group of prominent
investors and executives calling itself Focusing Capital on the Long
Term meets in New York.
As a sign of the issue’s
weight, U.S. Treasury Secretary
Jacob Lew is expected to discuss
how public policy can support the goals of the group’s members,
including chief executives such as
BlackRock Inc. ’s
Laurence Fink ,
Paul Polman and
Barclays PLC Chairman Sir David
Elliott Management Corp.,
a New York-based hedge fund, last year started criticizing
Juniper Networks Inc. for
spending $7 billion on acquisitions and nearly $8 billion in research
and development while its stock price greatly underperformed the
Nasdaq Composite Index since the
company’s 1999 initial public offering.
Last year, after settling
with Elliott to change the board, Juniper cut spending and repurchased
$2.3 billion of stock. It plans to buy back almost $2 billion more
The company paid its
first-ever dividend and borrowed money to fund some of the returns.
“The Juniper share
repurchase and cost-cutting efforts are the largest contributor to the
stock staying stable,” said
Scott Thompson , an analyst with
At the same time, he
warned that continued cuts could eventually hamper Juniper’s ability
to keep pace with innovation in the industry.
Some efforts haven’t
garnered the same praise. In early 2012, New York investment firm
Clinton Group Inc. took a stake in teen fashion retailer
Wet Seal Inc. and began urging a
share buyback. By February 2013, the company disclosed it was cutting
jobs and expenses and would repurchase $25 million of stock after
appointing four Clinton representatives to its board.
This January, Wet Seal
closed two-thirds of its stores and filed for bankruptcy protection.
In court documents,
executives cited a broader drag on teen retailers as well as missteps
that alienated core customers. People familiar with the bankruptcy say
that in hindsight the buyback was a bad decision.
“If we had rewound and
said they hadn’t done the buyback, that would have given them
substantially more flexibility,” said Jeff Van Sinderen, an analyst at
B. Riley & Co. “In those situations, $25 million dollars can go a long
—Mike Spector contributed
to this article.
Vipal Monga at
firstname.lastname@example.org and David