Harry Wilson, the nemesis of General Motors bondholders who were wiped out in the government-orchestrated GM bankruptcy, is back on the scene. On the front page of today’s Wall Street Journal, Wilson is portrayed as an “activist” investor, who seeks to maximize shareholder value. While his suggestion that GM buy back $8 billion of common shares would give a temporary boost to share price, Wilson’s motivations may not be entirely pure. His real agenda could be to expand the already-favored position of UAW shareholders, and to bolster the political fortunes of unions in general.
Here’s the deal, GM has announced that Wilson is nominating himself for a seat on GM’s Board of Directors “and bring before the annual meeting a proposal that the company commit to completing $8 billion of share repurchases on or before the first anniversary of the 2015 annual meeting.” I’ll bet that most of those shares will be bought, likely at a premium, from the UAW, which still holds about 140 million shares (over $5 billion worth).
Wilson played a key role in the GM bailout process when he testified on behalf of the Treasury Department during the bankruptcy hearing. Individual GM bondholders sought to slow down the process, which was ahead of schedule and moving too quickly to allow for fair treatment to creditors who had little political clout. Wilson threatened the court that the Obama Administration would pull out of the deal and allow GM to be liquidated if the court granted bondholders’ request for due process. The threat was taken seriously and the deal, which favored the Obama-friendly UAW’s interests, was pushed through as planned without further delay.
Harry Wilson’s union-friendly stance during the auto bailouts was recognized by the Teamsters Union, which insisted on Wilson being brought aboard YRC Worldwide’s board of Directors to help with “restructuring” of the struggling trucking company a few years ago. Wilson was paid advisory fees plus about $250,000 per month to help out the Teamsters. It seems that he will be rewarded this time around by hedge funds that are paying for his involvement with GM, as explained by GM’s media release:
Mr. Wilson’s notice indicated that he is acting with and on behalf of himself and four investment funds that support his election and proposal: the Taconic Parties, Appaloosa Parties, HG Vora Parties and the Hayman Parties, which together own approximately 34.4 million shares, or approximately 2.1 percent, of the company’s common stock. Mr. Wilson’s notice further indicates a fee arrangement under which he will receive a percentage of the group’s profits from their investment in GM.
The involvement of Wilson with GM should be rewarding for shareholders; at least in the short term. The idea is that GM is so darn cash rich since taking billions of taxpayer dollars in 2009 that they can now afford to buy back shares and raise dividends to shareholders. GM ended 2014 with about $28.2 billion of cash, equivalents and marketable securities. That is roughly the same amount as they had at the end of 2007, just one and a half years before the company filed for bankruptcy.
GM took $50 billion from US taxpayers, obviously more than they needed to survive the 2008 and 2009 auto industry downturn. Ford survived that downturn without taxpayer funding by maintaining a larger cash reserve than GM did. Now GM wants to act like a government entity and spend that hoard as quickly as possible while raising debt levels. The UAW will, once again, benefit from the generous spending of cash provided by US taxpayers.
Shareholders should be aware that the short-sighted strategy that has them partying like it was 1999 may come back to bite them when the highly cyclical auto industry hits an inevitable future downturn. To the UAW and current shareholders of GM I would say, enjoy the party because the hangover is really going to suck.
Mark Modica is an NLPC Associate Fellow