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The Globe and Mail

GM head Mary Barra’s record profit not inspiring shareholders

General Motors chief executive Mary Barra is facing pressure from prominent shareholders to translate GM’s enviable financial results into a higher stock price.

Jeff Kowalsky/Bloomberg

Mary Barra has more than turned around General Motors Co. That's not been good enough for Wall Street.

The record profit Ms. Barra has delivered as chief executive officer has failed to inspire shareholders, including a high-profile one: hedge-fund billionaire David Einhorn. His proposal on Tuesday to split GM stock into two classes – summarily dismissed by GM – underscores the challenges Ms. Barra faces in translating GM's enviable financial results into a higher stock price.

The discrepancy also shows why the Detroit automaker continues to be a tempting target for activist investors, hedge funds and merger-minded rivals. Unlike major competitors including Toyota Motor Corp. and Volkswagen AG, she can't count on the protection of government ownership or family control to swat away the gadflies.

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"Everyone else who GM competes with, like Toyota or Volkswagen, doesn't deal with this," Maryann Keller, who followed GM as a Wall Street analyst and has written several books about the company, said by phone. Mr. Einhorn's idea to introduce a class of dividend shares "doesn't make sense."

The Ford family controls Ford Motor Co. with a special class of stock that can ward off investor pressure. Fiat Chrysler Automobiles NV has the Agnelli family's Exor NV investment firm and Volkswagen has the Porsche family and Germany's Lower Saxony among its owners. Very little happens to France's carmakers without the government's say.

Pressure for CEO

Ms. Barra, on the other hand, has faced two activist challenges and public pressure for a merger with Fiat Chrysler during her more than three-year stint leading GM.

Her first challenge, in 2015, involved a co-ordinated effort by four hedge funds and Harry Wilson, who was the U.S. Treasury Department's overseer of GM when the government sponsored the company's 2009 bankruptcy. Complaining that GM was swimming in cash and needed to share with investors, the group got Ms. Barra to conduct a $5-billion buyback and commit to returning more cash on a regular basis.

Later that year, Fiat Chrysler CEO Sergio Marchionne publicly called for GM and FCA to merge and e-mailed Ms. Barra to start talks. She and the board rejected the idea.

Enter Mr. Einhorn, who gained notoriety as a short seller by betting against Lehman Brothers Holdings Inc. before the bank's 2008 collapse. His approach was motivated in part by GM's stock trading at a cheap valuation relative to other stocks, including car companies.

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Lagging returns

While GM has boosted profit by 51 per cent since its November 2010 initial public offering, its stock has returned just 20 per cent, trailing the 127 per cent gain for the Standard & Poor's 500 Index, the president and co-founder of Greenlight Capital wrote in slides posted to the hedge fund's website.

Mr. Einhorn wants to split GM's shares into two classes, with one collecting on the company's dividend and another capturing the value from its earnings. The dividend stock buyers would be entitled to the $1.52 a share a year GM pays out now.

"GM's dividend is not respected by the market," Mr. Einhorn wrote. Creating a second class of shares would "unlock GM's value by forcing the market to appropriately value the dividend and give credit for GM's earnings potential."

The two stocks together would be worth between $43 and $60 a share, boosting shareholder value by as much as $38-billion, Mr. Einhorn said. His proposal helped send GM's stock up 2.4 per cent, the biggest jump in six weeks, to close at $35.56 on Tuesday in New York trading.

Push back

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Mr. Einhorn made his proposal seven months ago, prompting a review by GM executives, directors and bankers and direct talks with Greenlight, which has held the company's shares since early 2011.

Ultimately, GM didn't buy the argument that the two stocks would raise value and thought it might even prompt investors to react negatively. The company also turned down Greenlight's nomination of four candidates to join the board as directors.

GM floated the proposal with credit rating companies. Both Moody's Investors Service and Standard & Poor's indicated the move could lower GM's credit ratings, said Joanne Krell, a GM spokeswoman. The two ratings companies went public with their positions Tuesday.

"The proposed structure creates an unacceptable level of risk for our company and its shareholders," Ms. Barra said in a statement on GM's website.

On CNBC, Mr. Einhorn called the credit ratings issue a "red herring."

"The company had informal conversations with the ratings agencies," he said on the television network. "I think they misrepresented what we shared with them."

Tesla gaining

The agitations from investors may be far from over. While GM has the Chevrolet Bolt electric vehicle hitting the market this year ahead of Tesla Inc.'s Model 3, the upstart run by Elon Musk is gaining on GM in market capitalization.

Over the last three years, Tesla shares have surged 73 per cent and GM's slipped 3.5 per cent. At $45.3-billion, Tesla's market cap is now just $8-billion less than GM's.

The next industry sales dip will determine whether GM can find love from investors, Ms. Keller, the independent auto analyst said.

"If GM can sustain profits in a down cycle, then people will notice," she said.

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