GM locks horns with Wall Street titan Einhorn
Billionaire’s idea to split GM stock has set up shareholder battle
General Motors once again finds itself in the middle of a high-stakes, high-finance battle with one of the titans of Wall Street — David Einhorn.
The hedge fund billionaire essentially wants to split GM’s stock into two classes — one designed for big dividend returns and another designed to reward shareholders if the automaker’s profits and stock price grows — and plans to nominate his own slate of directors.
Einhorn, president and cofounder of Greenlight Capital, is among Wall Street’s most influential investors. He correctly predicted in 2008 that Lehman Brothers was going to go bankrupt under the weight of its subprime-mortgage debt. Forbes magazine described Einhorn’s book, Fooling Some of the People All of the Time as “the Bible of short-selling.”
GM is firmly rejecting the idea, calling it risky for shareholders.
Einhorn, however, argued on CNBC that GM’s stock price has been undervalued for years and said investors have not reaped adequate rewards since the automaker’s public stock offering in 2011. The only unknown, he said, is whether his proposal would unlock $13 billion in value for shareholders or as much as $36 billion.
“It allows the company to face whatever challenges and opportunities that it has from a stronger position from having a lower cost of capital,” he said.
That stark difference of opinion, and Einhorn’s willingness to be a vocal advocate for his viewpoint, sets up GM for a shareholder battle that likely will continue to play out at least until early June, when the automaker is expected to hold its annual meeting and his proposal comes up for a vote.
His fund owns 52 million shares of GM stock, or just over 3% of GM’s common stock.
GM said it spent seven months reviewing Einhorn’s proposal.
“The board and management are confident that eliminating the dividend on the existing GM common stock and distributing the proposed new ‘dividend security’ creates an unacceptable level of risk and would not serve the best interests of GM shareholders,” GM said in a statement.
Moody’s Investor Service agreed, saying such a dramatic overhaul of GM’s shareholder structure could result in a downgrade of the automaker’s debt rat- ing. “If adopted, the proposal would represent a significant departure from the company’s current financial strategy,” Moody’s said. “This well-defined and publicly communicated strategy was an important element in the recent upgrade of GM’s ratings.”
GM’s decision to sell its money-losing Opel and Vauxhall brands came on the heels of the automaker’s decision to discontinue sales of mainstream Chevrolet models in Europe in 2015, exit Russia in 2015 and end manufacturing in Australia in 2016 — definitively sending GM in a new direction.
The automaker also beat analysts’ expectations with record earnings of $6.12 per share in 2016, a 22% increase over 2015.
“GM’s board and management are fundamentally transforming our company by executing a plan that is delivering record financial and operating results and returning significant capital to our shareholders,” GM CEO Mary Barra said in a statement.
But some argue that Einhorn’s idea makes sense.
“There is nothing radical about Einhorn’s proposal,” said Anthony Sabino, a professor at St. John’s University’s Peter J. Tobin College of Business. “Investors will benefit from having a choice of how they wish to invest in GM.”
Einhorn’s hedge fund holds major positions in stocks such as Apple, energy companies and sovereign debt — and is known for “shorts” — or making bets that well-regarded companies are overvalued and headed for a fall and has nearly $10 billion of assets under management.
“When Einhorn calls, you listen, not just because he is powerful, but because he is really smart,” Gordon said.
In 2012, Britain’s Financial Services Authority fined Einhorn $7.2 million pounds (about $10 million) in an insider trading controversy. Einhorn disputed the charge and denied wrongdoing but said he was paying the fine to avoid a long legal fight.
He also is known for his occasional snarky wit. Last October, after Tesla and SpaceX CEO Elon Musk spoke of his plans to populate Mars, Einhorn said, “It’s pretty amazing that we live in an age when the CEO of two public companies can give a talk about colonizing Mars and shareholders don’t see that as a warning signal.”
David Einhorn, above, president and co-founder of Greenlight Capital, is among Wall Street’s most influential investors. His fund owns 52 million shares of GM stock.