GM plans $5B stock buyback

DETROIT - General Motors (GM) has headed off a potentially divisive proxy fight by agreeing to a $5 billion stock buyback that starts immediately and will close by the end of next year.

The move announced Monday before the markets opened is part of a deal with Harry Wilson, a former member of the government task force that restructured GM coming out of its 2009 bankruptcy. In exchange, Wilson agreed to withdraw his hostile candidacy for the Detroit automaker's board of directors.

Wilson had accused GM of hoarding cash to the detriment of shareholders. He had sought an $8 billion buyback and a seat on the board.

GM, which had $25.2 billion in cash at the end of last year, now says it will maintain a cash balance of $20 million and keep its investment-grade status.

The share repurchase will begin immediately and finish before the end of 2016. Investors appear to like the announcement. GM shares rose 91 cents, or 2.5 percent, to $37.45 in premarket trading Monday.

GM also announced plans to return capital to shareholders each year and said it will announce them each January. It also reiterated plans to invest more than $9 billion in the company this year to prepare to roll out more new vehicles in the coming years.

Wilson, 43, filed notice of his board candidacy on Feb. 9 in a letter to GM CEO Mary Barra. He represents four hedge funds that own 34.4 million GM shares, about 2.1 percent of the company.

Barra said in a statement that the buyback came from "constructive dialogue" with shareholders.

"We arrived at a win-win outcome that includes a thoughtful approach to critical capital allocation issues," Wilson said in the same statement issued by the company.

In an interview with The Associated Press last month, Wilson said shareholders are frustrated with GM because it's an underperforming company with substantial cash that needs help reaching its potential. "They are not a very good steward of capital," Wilson said.

GM, which posted a $2.8 billion profit last year despite massive recall costs, ended the year with $25.2 billion in cash available.

Before a jump in the stock price after raising the dividend in early February, GM "had not generated a dollar of net value for shareholders," Wilson said. GM shares were trading around $33, about the same price as its post-bankruptcy public offering in November of 2010, he said.

The company, he said, has not improved its profit margins appreciably, and is behind other automakers in working with parts supply companies to develop more models off fewer car and truck architectures.

Wilson said he respects Barra, the first female head of a major automaker, and isn't looking for a management change. He told her during their meeting that she can't be a great CEO without giving shareholders great value.

Wilson said the hedge funds he represents, including Taconic Parties, Appaloosa Parties, HG Vora Parties and Hayman Parties will take its concerns to other shareholders. "Our view is we're going to press this as much as necessary to help the company reach its full potential," he said.

Wilson will get a percentage of any profits the hedge funds make on their GM shares, according to government filings.

GM restored its quarterly dividend in January of 2014 for the first time in six years. In early February the company announced it would raise the dividend 20 percent in the second quarter to 36 cents, pending board approval. The chief financial officer said it could go even higher once GM gets a better handle on recall costs.

GM faces uncertainty in several areas that could drain its cash stockpile. The Justice Department is investigating the company for failing to disclose a deadly ignition switch problem in its small cars to government safety regulators. That penalty could be as much or more than the $1.2 billion that Toyota paid in a similar case. The switches are responsible for at least 57 deaths, and GM has committed to making payments to those injured and families of those who were killed. The company has set aside $400 million for the payments but says they could go as high as $600 million.

Like other Detroit automakers, GM also faces the financial uncertainty of contract talks with the United Auto Workers union later this year. Longtime union members want hourly pay raises, which they haven't received since 2007, while the companies want to stick with a profit-sharing formula for compensation to keep fixed costs under control. The union also wants to bridge the gap between veteran workers who make around $29 per hour and recent hires who make from $16 to $19.

GM executives often talk about returning cash to shareholders. But they also repeatedly have touted a "fortress balance sheet" with enough cash to weather an economic downturn such as the Great Recession, which sent the company into bankruptcy protection.