NEW YORK (Reuters Breakingviews) - David Einhorn’s financial-engineering bid has hit a dead end at General Motors. His fund Greenlight Capital’s proposal to boost the automaker’s value by issuing a new class of dividend shares got a drubbing from investors at Tuesday’s annual meeting. Chief Executive Mary Barra can’t afford to gloat, though. The company’s stock is flatlining and plenty of speedbumps lie ahead.
Einhorn contended that splitting the stock into one class of shares entitled to the company’s dividend in perpetuity and a separate class entitled to any additional profit generated by growth would attract more investors. He also argued it would boost the company’s $52 billion market value by as much as $38 billion.
GM countered that the plan would reduce its financial flexibility while doing nothing to improve the fundamentals of its business. It helped that Moody’s labeled the idea “credit-negative” and that proxy advisors Institutional Shareholders Services and Glass Lewis recommended shareholders reject it. They did so overwhelmingly, with more than 91 percent of those voting – 96 percent if Greenlight’s stake is excluded – backing the company.
The valuation issue that prompted the hedge-fund manager’s intervention hasn’t gone away, though. GM shares trade at just 5.59 times consensus earnings expectations for 2017, the lowest multiple of any profitable company in the S&P 500 Index. At just over $34 a share, the stock is barely above the price at its initial public offering in November 2010.
Barra hasn’t been standing still. She is aggressively refreshing GM’s vehicle lineup, agreed in February to sell the European business to PSA Group for $2.2 billion and expects to return $7 billion to shareholders this year through buybacks and dividends.
The company is heading towards nasty looking traffic, though. U.S. auto sales are softening and discounts are spreading to the sport utility vehicles and light trucks that generate a large chunk of Detroit’s profit. Spending heavily to develop electric cars and self-driving technology will make it even harder to maintain current levels of profitability.
Barra can take some comfort from Tuesday’s shareholder support. But Barra only has to look at crosstown rival Ford - which abruptly ejected Mark Fields last month – to realize how quickly that can evaporate. Steering GM to the future could yet be a rocky road.
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