General Motors’ shares have taken a hit this week with the catalyst for the latest downturn being news out of China. Continued weakness in China (including weakening car sales) has led the country to devalue its currency in an attempt to bolster its economy at the expense of its trading partners. This latest news confirms my views that GM’s China gamble puts the company and its shareholders at increased risk. The horrible performance of GM’s stock over the past few months also brings into question the rationale for the much-hyped share buyback that was instigated by ex-Obama Auto Task Force member, Harry Wilson, in photo.
Mr. Wilson was one of the primary architects of the auto bailouts which gave about $30 billion of American taxpayer money (along with approximately $10 billion from Canada) to GM to guide them through their Obama-orchestrated bankruptcy process in 2009. Less than six years later, Wilson resurfaced as a representative for four hedge funds in the role of an activist investor and requested that some of that taxpayer-supplied “cash hoard” be returned to investors. In March of this year, GM agreed to repurchase $5 billion worth of shares at the behest of Wilson, a move I criticized during a CNBC interview.
Things were looking up for GM shareholders for a short period of time as the media hyped the share buyback news. The implication that GM was so financially strong that it could easily afford to buy back shares and “return” money to its shareholders (wouldn’t it be taxpayers that should have money “returned?”) resulted in a knee-jerk response with shares rallying to the high $38 range. Now, just over five months after the GM share buyback news, shares are trading near all-time lows and well below the 2010 IPO price of $33. So Harry, just what was the point of the buyback?
Let’s put GM’s recent share performance in perspective. Since around the time of the buyback hype GM shares have decreased roughly 20% while the broader S&P 500 index has been about flat. For apologists that want to point to weak performance for auto manufacturers I would compare the performance to Ford, which has decreased approximately only 10% during the same time period. The worst part of the story is that the downturn is coming at the same time as blockbuster auto sales.
So just what’s going on with GM? The answer should be clear, the company has not been “fixed” just because the government gave it billions of taxpayer dollars to protect political allies at the UAW. The primary reason that the company continues to struggle is that GM management, along with those influential government minds like Harry Wilson, do not seem to have a clue as to how to best run an auto manufacturing company. The fact that there is no effort being made by GM to conserve cash to ride out market downturns is a telling sign that management has not learned from the past.
I have often pointed out the missteps of GM management, there is no need to debate that when the company’s share price clearly confirms that management is failing. Just look at GM CEO Mary Barra’s statements when she agreed with the Wilson share buyback plan. Automotive News reported with the following regarding GM’s share buyback plan and the strategy of increasing spending:
The company already had said that it planned to boost its capital spending by about 20 percent this year, to $9 billion, as it prepares for a more aggressive rollout of new and redesigned vehicles. Barra said the increased spending is aimed at “not only investing in the existing portfolio. It's looking for other portfolio entries that offer us the ability to build our brands.”
Barra said GM and its board had been working on a broad capital-allocation strategy even before Wilson came forward with his proposal.
"We were on a path to do this anyway," Barra told reporters. "We found that there was some important points to make [to shareholders] to provide greater transparency and clarity" about GM's operating performance and capital-allocation plans.
GM’s government-inspired mentality that increasing spending is always a positive brought warnings from credit rating agency, Moody’s, which commented on the move:
Corporate credit ratings service Moody's called GM's move a "negative credit development," but said GM's ratings and stable outlook are unchanged. Moody's rates GM's credit at Baa3, the lowest level of investment grade.
"This program weakens GM's positioning at the current rating level and will likely delay any potential consideration for an upgrade," Moody's Senior Vice President Bruce Clark said in a statement today.
Of course wantonly spending billions of dollars, whether it be on share buybacks or in risky markets like China and Russia (which was another loser for GM) will weaken GM’s positioning. The company’s share performance attests to this. The next shareholder activist that comes along in an attempt to “unleash value” at GM should consider pressing for a change to an area in obvious need of improvement, which is the management.
Mark Modica is an NLPC Associate Fellow.