There was no way David Einhorn was ever going to get his way with GM

Greenlight Capital founder David Einhorn at the Sohn Investment Conference in New York City, May 8th, 2017

At General Motors’ annual shareholder meeting on Tuesday, a proposal from Greenlight Capital to split the carmaker’s stock into two classes and replace three directors on the board was shot down.

Greenlight’s David Einhorn has been pushing his scheme hard over the past few weeks, firing off letters to GM shareholders and decrying the company’s management for a stock price that’s currently trading at its 2010 IPO price. Greenlight owns 3.6% of GM’s stock, so Einhorn has understandably been looking for ways to get it moving.

GM was having nothing of it, repeatedly calling the scheme “financial engineering” and reminding shareholders that the major rating agencies said the Greenlight proposal would sink GM’s investment grade status.

Despite all that, you have to give it to Einhorn for coming up with an idea that would possibly get the stock up. By some analyses, GM is currently the most undervalued company in the entire S&P 500. Ultimately, the plan didn’t have much to do with enhancing GM’s business, which has been booming on highly profitable pickup and SUV sales.

At base, it looked like a way to wall off the dividend – currently with a 4.5% yield – and create new shares that would theoretically offer equity growth, but in reality would be a vessel for share buybacks. GM is already executing a share buyback plan with its stock, but Einhorn wanted to effectively intensify that process.

GM also argued that the dividend shares’ potential to undermine the credit rating, a major liability of the auto market goes into a downturn and GM has to activate more of its borrowing capacity.

Einhorn fought hard, but he went down in flames.

“Based on the preliminary results, all of the GM Board’s director nominees were elected with between 84 and 99 percent of the votes cast and Greenlight’s dual-class common stock proposal was defeated with more than 91 percent of the votes cast against the proposal, or 96 percent excluding Greenlight’s shares,” GM said in a statement.

GM CEO Mary Barra.
Ruben Sprich/Reuters

Not a poor loser

Einhorn wasn’t a poor loser.

“We decided to bring a creative idea to GM’s shareholders and nominate directors to help fix GM’s inefficient capital structure and unlock significant value for all shareholders,” he said in a statement.

“We are disappointed that shareholders have elected to maintain the status quo. We congratulate GM’s management on their win today.”

In some respects, although Einhorn’s proposal looked doomed from the start, it did produce two positive results.

First, it got Wall Street thinking about why GM, a company that has executed superbly for years, notching quarter and quarter of profits creating a fortress balance sheet, could be worth as much as Tesla, a company that’s almost never made money and sells a fraction of the vehicles that GM does.

Second, it may have shown GM’s management team – led by CEO Mary Barra and perhaps the best in the company’s history – that it needs to stress its own story of growth and discipline more aggressively. Post-bankruptcy, the company has aggressively resisting slipping back to arrogant “Old GM” mode.

But Barra has made numerous tough calls and bold investments. GM sold its money-losing Opel division to Peugeot, pulled Chevy out of Europe, ended manufacturing in Australia, and exited the Russian market. The company has been patiently waiting for Wall Street to figure out how well it’s now being run.

So the lesson it can learn from Einhorn is that impatience attracts attention. And the advantage that GM has over the activist investor is that instead of radical “financial engineering,” it can offer a business that’s well worth buying into.