Hoping to provide their investors with additional amounts of cash, General Motors just announced a $5 billion stock buyback plan. At the start of her second year as the auto manufacturer’s chief executive officer, Mary Barra is now facing an activist investor after having put the issue of safety investigations concerning the company’s faulty ignition switches to rest.
This plan is one part of the deal that General Motors struck with Harry Wilson, the former government task force member who masterminded the GM restructuration after the company’s 2009 bankruptcy. Wilson had accused General Motors of not having released sufficient amounts of cash to their shareholders. In fact, the multiple hedge fund representative demanded that a board seat as well as an $8 billion buyback be agreed upon as a result of the misunderstandings.
However, the CEO’s quick response soon satisfied Wilson’s (and the hedge funds’) requests after GM’s management agreed to the majority of their requests.
According to statements from both Wilson and Barra, discussions had been ongoing for over two weeks. The proposed buyback had been agreed upon by the majority of their shareholders, as the company already had plans of setting up a satisfactory buyback scheme.
At the end of 2014, General Motors wanted to ensure that the company had enough capital to no longer allow a financial crisis to destabilize the car manufacturer. As a result, it created what they called “a fortress balance sheet” of approximately $25,2 billion in cash. In the future, such figures will become common practice with the automaker as a minimum cash balance of$20 billion is to be maintained. Another aspect General Motors doesn’t want to lose focus of is its investment-grade credit ranking, which they aim to maintain.
Apart from their buyback schemes, General Motors had also aimed to boost quarterly dividends by at least 20% to 36 cents. By taking on such major commitments, General Motors s expecting total costs of approximately $10 billion by the end of next year.
In the meantime, Barry is also facing added pressure from the United Auto Workers union, who is aiming to enter contract talks by the end of the summer. According to the union, its veteran members haven’t received a raise since 2007. Dennis Williams, UAW president, already revealed some of the union’s requests: for entry-level workers, GM should consider raises (as currently, their hourly salary caps at $19.28). For senior factory workers, who make $28 hourly, different types of incentives should be considered. And this poses yet another delicate issue for Barbara, Maryann Keller, independent auto Greenwich consultant believes.
“GM just said they will give shareholders $5 billion in dividends and a $5 billion buyback. The union will want to be paid.”
After GM’s announcement that the company would be investing in Mexico, UAW wants to be assured that new products would also be built within the automaker’s US factories.
Labor relations professor Gary Chaison is convinced that GM’s CEO will be strong-armed into an arrangement with the union especially after the situation with hedge fund representative Wilson, where several billions of dollars could have been spared.