A group of General Motors (NYSE:GM) investors thinks GM is holding too much cash. They want to elect a representative to GM's board -- and force GM to do an $8 billion stock buyback.
That would almost certainly boost GM's share price, at least for a little while. But one of GM's biggest shareholders thinks it's a bad idea -- and he's speaking out about it.
And when Warren Buffett speaks out on something, investors should listen very carefully.
Buffett takes a dim view of this hedge fund cash grab
Buffett is, of course, the CEO of Berkshire Hathaway (NYSE:BRK.A), which held a 2.6% stake in GM as of Dec. 31 -- 41 million shares. Speaking to CNBC earlier this week, Buffett praised GM CEO Mary Barra and indicated that he opposed the activists' plans.
"It's just not the way to run a business," Buffett said of the effort.
A group of four hedge funds that together own just under 2% of GM's common stock have banded together behind an effort to elect Harry Wilson to GM's board. Wilson was a member of the government-appointed task force that steered GM through its 2009 bankruptcy -- and he has made it clear that GM isn't being run the way he'd like it to be run.
The hedge funds have promised to pay Wilson a fee equal to 0.25% of their GM shares annually, according to a regulatory filing. Wilson also stands to gain as much as 4% of any share-price gains the funds realize over the next two years.
Buffett doesn't like that idea. It's not hard to see why.
Investing in the business beats buying back shares
Buffett pointed out that an automaker can run through cash very quickly if economic conditions sour. GM has said that its large cash reserve, which totaled $25.2 billion as of Dec. 31, is a reserve against such an event -- part of what GM executives have characterized as its "fortress balance sheet" strategy.
Buffett said that "the idea of doing something now that will get a little pop in the stock" should not be on Barra's agenda. He said that he wanted to see GM build on its existing strengths instead.
Put another way, Buffett unsurprisingly wants GM to create shareholder value the old-fashioned way -- by investing in its business.
GM has already made it clear that it plans to spend big bucks in coming years on several new Asian factories, a $12 billion investment in new products and marketing for its luxury Cadillac brand, and a slew of new sedans and SUVs and other models. These are all important initiatives that, done right, will boost GM's profits and cash flow and add to GM's value as a company.
Barra and her team will try to do as much of that as they can without tapping into GM's cash hoard. But if the economy turns south and profits get squeezed, GM will need to tap that cash to keep its plans on track. A failure to do so could leave it dangerously behind better-prepared competitors once the economy improves.
Barra's conservative approach is in line with Buffett's principles
Barra and her senior leadership team have been determined to show that they have learned the lessons of GM's 2009 crash into bankruptcy. All indications are that Buffett is strongly supportive of their plans -- and wise to the dangers that can befall a company that isn't careful.
In Berkshire's annual letter to shareholders, released last weekend, Buffett warned of "arrogance, bureaucracy and complacency," the "ABCs of business decay" that had undermined great American companies in the past, including GM.
Buffett meant that as a warning to his successors about the risks facing Berkshire. But it's also a good warning for GM shareholders to heed.