By Vipal Monga And David Benoit
General Motors 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 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 made the buyback decision after top officials determined its
$25 billion in liquidity 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 had been under consideration and the
investor talks sped it up.
"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.
Its 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?
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 board.
"Capital allocation is an underappreciated discipline," Mr.
Wilson said in an interview on Monday. "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 it would discuss more capital returns
later this year. The company was waiting for clarity around any
fine the Justice Department may 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 CEOs such as BlackRock Inc.'s
Laurence Fink, Unilever PLC's Paul Polman and Barclays PLC Chairman
Sir David Walker.
Activist investors generally take stakes in companies and then
press for changes, such as stock buybacks or dividends or corporate
breakups. Some data suggest activists discourage companies from
investing in their businesses, something many activists would
readily admit, citing wasteful spending.
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 same period.
Meantime, corporations 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."
Elliott Management Corp., a New York-based hedge fund, last year
started criticizing networking equipment manufacturer 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 through 2016. 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 Wedbush Securities. 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 way."
Mike Spector contributed to this article.
Write to Vipal Monga at vipal.monga@wsj.com and David Benoit at
david.benoit@wsj.com
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