General Motors is being challenged by Harry Wilson and his hedge fund partners to return more of its $25 billion cash hoard to shareholders.
Returning value to shareholders is a good thing in theory, but the $8 billion buyback Wilson is demanding represents a risky proposition. Cash is king in the auto industry. When developing a single new-vehicle design can cost a billion, automakers need huge reserves just to operate.
In hard times, companies need cash even more. In the Great Recession, Ford Motor Co. just scraped by because it had mortgaged everything for cash reserves. GM and Chrysler ran out of cash and had to be rescued through bankruptcy. And GM's reserves today are far lower than Toyota's and Volkswagen's.
But those restive GM shareholders have a point, too. GM hasn't performed as well as other automakers post-recession. It's earning less than its rivals. It has returned fewer financial rewards to new shareholders that bet on GM post-bankruptcy.
It's a new GM, free of the debt that crushed its predecessor. But GM management must recognize the automaker's stock is no longer a safe widows-and-orphans holding. Those shareholders got wiped out. By definition, its new investors have an appetite for risk, and they demand profit in return.
GM management may weather this shareholder squall, but it must prove it deserves respect.
The only way for GM to attract the more patient investors is to deliver superior long-term performance.