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GM Sets Buyback, Placating Activists

General Motors Co. on Monday became the latest company to return billions of dollars to shareholders amid tussles with investors over how to better allocate corporate cash, reported The WSJ.

Facing a potentially contentious fight over a board seat and a larger buyback, the car maker tried to walk the line between placating big investors and spending more on its future.

GM disclosed a $5 billion stock repurchase, a sum that comes on top of a previously announced dividend increase, and an additional $9 billion it will spend this year to improve brands including Cadillac, boost fuel efficiency and develop electric and driverless cars, among other things.

GM’s decision highlights a dilemma facing many companies as activists cement their toehold in boardrooms: Who is better at determining the appropriate use of cash as corporate balances grow?

Some data suggest activists discourage companies from investing in their businesses, something many activists would readily admit, citing wasteful spending.

Companies in the S&P 500 targeted by activists between 2003 and 2013 reduced their spending on plants, equipment and research to 29% of their cash from operations in the five years after activists bought their shares from a median of 42%, according to an analysis conducted for The Wall Street Journal by S&P Capital IQ’s Quantamental Research unit.

That compares with the much smaller drop to 25% from 27% for nontargeted companies over the same period.

Meantime, corporations targeted by activists boosted dividends and stock repurchases to a median of 37% of operating cash flow in the first year after being approached by activists, from 22%. S&P 500 companies that weren’t targeted by activists showed a 10-point increase, to 36%.

“Companies only have a finite amount of cash,” said David Pope, a managing director at S&P Capital IQ. “If they spend it on shareholder returns, there is less cash to spend on everything else.”

GM made its buyback decision after top officials determined its $25 billion in cash was more than enough to fulfill spending plans and handle uncertainties like the federal investigation into a botched ignition-switch recall. People familiar with the decision said a buyback already was under consideration and investor talks sped it up.

“We believe an initial $5 billion share buyback is good for our owners because we cannot earn better returns by investing that cash in the business at this time,” GM finance chief Chuck Stevens said on a conference call.

Separately, on Tuesday, some large investors and corporate chiefs are gathering in New York to debate the social and economic impact of rising shareholder pressure.

The nation’s largest auto maker had come under fire from Harry Wilson, a former architect of GM’s federal bailout, who wanted an $8 billion buyback and had the backing of four hedge funds in his bid to get a seat on the company’s board.

“Capital allocation is an underappreciated discipline,” Mr. Wilson said in an interview on Monday.

“When activism works well, one of the things it does is try to create a disciplined framework around this decision.”

GM had said last month that it would discuss more capital returns later this year.

The company was waiting for clarity around any fine the Justice Department might levy as well as other litigation that may result from a massive recall due to faulty ignition switches, the people said.

Mr. Wilson and the funds have dropped the request for a board seat in light of the buyback and GM’s pledge to better explain its spending and goals.

GM stock rose 3.1% to $37.66 in 4 p.m. New York Stock Exchange trading on Monday.

Not all investors were excited. James Potkul, a Parsippany, N.J., investment manager who controls about 10,000 GM shares, said the auto maker should instead marshal its cash to protect against uncertainties. “Are they worried about a downturn? They should be,” he said. “These companies can burn cash pretty badly when a downturn comes.”

How and when to use capital will be the topic of debate when the group of prominent investors and executives calling itself Focusing Capital on the Long Term meets in New York.

As a sign of the issue’s weight, U.S. Treasury Secretary Jacob Lew is expected to discuss how public policy can support the goals of the group’s members, including chief executives such as BlackRock Inc. ’s Laurence Fink , Unilever PLC’s Paul Polman and Barclays PLC Chairman Sir David Walker.

Elliott Management Corp., a New York-based hedge fund, last year started criticizing networking-equipment manufacturer Juniper Networks Inc. for spending $7 billion on acquisitions and nearly $8 billion in research and development while its stock price greatly underperformed the Nasdaq Composite Index since the company’s 1999 initial public offering.

Last year, after settling with Elliott to change the board, Juniper cut spending and repurchased $2.3 billion of stock. It plans to buy back almost $2 billion more through 2016.

The company paid its first-ever dividend and borrowed money to fund some of the returns.

“The Juniper share repurchase and cost-cutting efforts are the largest contributor to the stock staying stable,” said Scott Thompson , an analyst with Wedbush Securities.

At the same time, he warned that continued cuts could eventually hamper Juniper’s ability to keep pace with innovation in the industry.

Some efforts haven’t garnered the same praise. In early 2012, New York investment firm Clinton Group Inc. took a stake in teen fashion retailer Wet Seal Inc. and began urging a share buyback. By February 2013, the company disclosed it was cutting jobs and expenses and would repurchase $25 million of stock after appointing four Clinton representatives to its board.

This January, Wet Seal closed two-thirds of its stores and filed for bankruptcy protection.

In court documents, executives cited a broader drag on teen retailers as well as missteps that alienated core customers. People familiar with the bankruptcy say that in hindsight the buyback was a bad decision.

“If we had rewound and said they hadn’t done the buyback, that would have given them substantially more flexibility,” said Jeff Van Sinderen, an analyst at B. Riley & Co. “In those situations, $25 million dollars can go a long way.”

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GM Names Craig Glidden General Counsel, Replacing Michael Millikin

DETROIT – General Motors has named Craig Glidden executive vice president and general counsel, effective March 1, reported MLive.

Glidden, 57, replaces Michael Millikin, 66, who is retiring in July.

Millikin faced harsh criticism from lawmakers on Capitol Hill for his department’s handling of GM’s ignition switch recall crisis, with one senator even wondering aloud why he had not been fired.

GM CEO Mary Barra defended Millikin’s work to lawmakers. Millikin has been with the company for four decades, including five years as legal counsel.

Glidden will now lead GM’s legal team, which is integrated into the company’s regional and functional teams in more than 30 countries.

“Craig Glidden has had a distinguished career managing complex legal issues around the world, and his broad legal and senior management expertise fits perfectly with our strategic priorities and plans for global growth,” Barra said in a release Thursday.

Glidden was most recently executive vice president and chief legal officer for LyondellBasell Industries, a plastics, chemicals and refining company. Before that, he was senior vice president, general counsel and corporate secretary of Chevron Phillips Chemical Co. And prior to that, he had a private law practice.

“I’m enthused to be joining General Motors and its management team to help drive the company forward,” Glidden said in the release. “The company has made significant progress in recent years and I look forward to further advancing the business goals.

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GM Returns to Bankruptcy Court Seeking Legal Protection

The same judge who oversaw General Motors’ 2009 bankruptcy will hear arguments Tuesday over how much of a shield the company still has against lawsuits involving vehicles and crashes from before the automaker exited bankruptcy in July 2009, most notably those vehicles with defective ignition switches, reported Detroit Free Press.

U.S. Bankruptcy Judge Robert Gerber isn’t expected to make a decision for weeks. After he rules, one side almost certainly will appeal to a federal court in New York.

A GM victory would at least limit its cost of recall-related lawsuits to vehicles produced after the bankruptcy. Any wrongful death or personal injury cases tied to the ignition-switch defect, in which the crash occurred after bankruptcy, could proceed. The Tuesday hearing involves cases brought to recoup economic loss and also victims’ lawsuits unresolved by a compensation process independently run for GM by compensation expert Ken Feinberg.

Should the plaintiffs prevail, GM could eventually have to pay a few more billions of dollars to cover mostly the legal fees incurred in pending class action lawsuits.

This slow legal process is unfolding against the backdrop of GM’s potential proxy fight with a group of hedge funds pressuring it to give shareholders $8 billion through a stock buyback.

On one side Tuesday will be attorneys representing thousands of people who own GM vehicles that were recalled last year for dozens of defects and potential malfunctions. They have sued for what they claim is the lost value of their cars and trucks. Some of the cases involved personal injuries or deaths.

Arthur Steinberg, an attorney with the firm of King & Spalding, will present GM’s argument.

GM had to know

First the plaintiffs’ view.

“The gist of our argument is quite simple,” said Steve Berman, a Seattle lawyer representing some of the plaintiffs who claim recalls eroded their vehicles’ value. “GM knew that it had a safety defect as a result of these defective ignition switches. Therefore GM was obligated to give them individual notice that they had a claim in bankruptcy court. The remedy is that the bankruptcy order is not applicable to those folks.”

Now for GM’s case.

The 2009 bankruptcy involved a sale of the automaker’s “good assets” to an entity called General Motors LLC, or “new GM.” The “bad assets” were retained by Motors Liquidation, or “old GM.”

The final sale agreement limited “new GM’s” liability to the unexpired portion of standard glove box warranties on vehicles manufactured before bankruptcy, any state Lemon Law obligations and claims from accidents or fatal incidents that occurred after the bankruptcy exit even if they involved vehicles produced by “old GM.”

Steinberg will argue that the company should be immune from all “lost value” lawsuits tied to vehicles produced before that time, even if the defects weren’t identified until last year.

GM contends those suits should be filed against “old GM,” a legal shell with assets that are far short of what is owed to thousands of other creditors. These plaintiffs would be at the end of a very long line.

Judge Gerber must determine whether GM had sufficient knowledge of any defects such as the defective ignition switches to warrant disclosure to him back in 2009 before old GM was given the shield and allowed to go broke.

The independent report by former federal prosecutor Anton Valukas, released last spring, was highly critical of GM’s delay in issuing a recall. But it found that neither CEO Mary Barra nor General Counsel Mike Millikin learned about the ignition defect until late January 2014.

Some mid-level engineers knew the switches were vulnerable to being bumped from the “on” position as early as 2003. Later higher-ranking engineers and some of Millikin’s legal staff knew how serious the flaw was, but they found out in 2012 or 2013.

Was there disclosure?

If Gerber rules GM intentionally failed before filing bankruptcy to disclose that or other defects that later led to recalls, the “lost economic value” owners have a much stronger case.

“Where it gets tricky is that some of the people who knew about this problem went from old to new GM,” said Claude Bowles Jr., a Louisville bankruptcy attorney with the firm of Bingham Greenebaum Doll. “Bankruptcy sales are final because you want the buyer to use the assets to build a viable enterprise. But you have to balance that against our notions of due process.”

Even the most liberal pro-GM interpretation by Gerber won’t solve all the company’s legal problems from last year’s tidal wave of recalls. The GM Ignition Compensation Fund continues to review remaining claims for deaths and injuries tied to the ignition-switch recall. GM has estimated the settlements reached through that process will cost between $400 million and $600 million.

For example, the family of Brooke Melton, the Georgia nurse who died in March 2010 after her 2005 Chevrolet Cobalt rolled off a highway near her home, have withdrawn their acceptance of a $5-million settlement GM offered before last year’s recall. But their attorney Lance Cooper said the Meltons, who chose not to pursue a claim with the compensation fund, will proceed with their case regardless of Gerber’s decision. Their daughter’s death occurred about a year after GM emerged from bankruptcy.

Berman said some of his clients own recalled vehicles from the 2010 through 2014 model years. Anyone who died or was injured in those vehicles were not eligible to submit claims to the GM Ignition Compensation Fund.

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GM Extends Top Lawyer’s Stay as Search for Successor Still Ongoing

General Motors Co said it has extended the tenure of its top lawyer, whose department was criticized over how it handled the issue of the automaker’s defective ignition switch linked to more than 50 deaths, and the search for a replacement is ongoing, reported Reuters.

Michael Millikin, 66, will now retire in July and be “available for consulting services” through the end of the year, according to a footnote in the Detroit company’s quarterly financial report filed last week with the U.S. Securities and Exchange Commission.

Last October, GM said Millikin would retire early in 2015 but remain general counsel, a position he has held since 2009, until a successor was named.

GM spokesman Jim Cain said on Monday that “the search is in great shape,” but declined to provide further details on when a replacement would be named.

The No. 1 U.S. automaker last year faced criticism for waiting 11 years to recall millions of cars with ignition-switch problems that were linked to fatalities. The switch can slip out of position, stalling the vehicle and disabling air bags, and the defect led to the recall of 2.6 million vehicles.

The company is being investigated by state and federal prosecutors for issues related to the faulty switch.

GM said in October that Millikin was not forced out and had even been asked by Chief Executive Mary Barra to stay on longer.

As part of their attempt to build a case against GM, sources said last summer that U.S. federal prosecutors were looking at whether lawyers who attended key meetings about the switch problems acted appropriately after the meetings or whether they mishandled information discussed.

Millikin’s legal department was heavily criticized in a 325-page report released by GM last June. Many of the 15 people fired or forced out from the department were attorneys or had worked under Millikin. However, the report said Millikin did not know the details of the ignition switch problem until early last year.

When Barra and Millikin were questioned at a U.S. Senate hearing last July, lawmakers demanded to know why Millikin was not fired. Barra defended Millikin at the time as “a man of incredible high integrity.”

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GM Financial Triples Share of GM Leases

SAN FRANCISCO AND FORTWORTH, Texas — Ally’s reaction to General Motors internalizing its leasing program came up at the end of GM Financial’s fourth quarter 2014 earnings call. Daniel Berce, the captive’s president and CEO, said the decision shouldn’t have surprised executives with GM’s former captive finance arm.

“That’s about increasing customer loyalty,” Berce said of GM’s decision. “Lease is a very important product from a loyalty standpoint, and having that customer data and relationship in-house and within control of the GM umbrella was extremely important. Taking that profitability in-house was another factor to consider.

“I don’t think bringing it in-house should be a surprise if you look at our ramp of penetration through 2014,” he added, noting that the firm started out the year with about a 15% share in GM leases. It finished 2014 with just less than a 50% share of the OEM’s lease business.

GM Financial doubled its lease origination volume from a year ago to $7 billion. For the December quarter alone, lease origination volume totaled $2.1 billion.

GM’s decision to end its leasing relationship with Ally Financial and U.S. Bank was announced shortly after the end of last quarter, with GM Financial officially becoming the OEM’s exclusive subvented lease provider for Buick-GMC on Feb. 3.

“Cadillac will follow closely after that [in March], then Chevy,” Kyle Birch, executive vice president and COO of North America, to F&I and Showroom at last month’s 2015 National Automobile Dealers Association (NADA) Convention & Expo in San Francisco. “By mid-year, we’ll have full lease exclusivity with all GM brands.”

Birch noted that GM Financial spent a lot of time and investment last year bringing its systems online in anticipation of the November 2014 rollout of its prime APR product. The company also rolled out last May a floorplan financing product; Berce noting during the company’s investor call that he has “pretty modest aspirations” for the product in terms of market share.

“We don’t have any plans at this point to supplant other providers,” he said.

But developing score cards and adding auto decisioning systems for its prime business weren’t the only infrastructure investments the company made last year. Under the direction of Will Stacy, senior vice president of digital and technology services, GM Financial is also working on systems that will drive a better connection between customers, GM and the OEM’s dealers.

“We’re trying to build integration tools with GM so you can apply for credit in an easier way through their sites and through their dealer’s sites,” Stacy told F&I and Showroom at the NADA’s annual convention. “So the idea would be, we’d offer an application or widget that goes on dealership sites so you can apply for a GM Financial loan through one of those 4,200 websites that GM and Cobalt host for their dealers, as well as a beefed up the customer experience for current and future customers with native applications on iPhones, Androids and customer portals.”

The goal, Birch added, is to create touchpoints that will allow customers to interact with the captive finance company however they want, whether through its chat features on the captive’s website, self-service portals or mobile connectivity. “We want to make sure when we have a customer on the books that we’re touching them at the right time to drive them back to the dealers,” Birch explained.

The investments made in the company’s infrastructure were partly responsible for the decrease in pre-tax earnings in the December quarter, which fell from $225 million in the year-ago quarter to $120 million, Birch noted. The company’s acquisition of Ally Financial’s international operations was another factor.

Full-year earnings for the captive were $537 million, down from $556 million in 2013. For the December quarter, the company posted earnings of $59 million, down from $121 million in the year-ago quarter.

Full-year consumer loan and lease originations totaled $21.4 billion, $6 billion for the December quarter alone. Prime originations for GM vehicles totaled $493 million for the year. Outstanding balances of consumer finance receivables totaled $25.7 billion for the year.

The company also added 81 dealers to its commercial lending business, bringing the captive’s total dealer count to 487.

Birch also noted stable credit metrics, with consumer finance receivables 31 to 60 days delinquent accounting for 4.2% of the captive’s portfolio as of Dec. 31, 2014. Accounts more than 60 days delinquent were 1.7%.

Annualized net losses were 2.2% of average consumer finance receivables for the December quarter, up from $2.1% one year ago. For the year, consumer net losses were 1.9%.

GM Financial also reported having total available liquidity of $9.3 billion as of Dec. 31, 2014. That total consisted of $3 billion of unrestricted cash, $4.8 billion of borrowing capacity on unpledged eligible assets, and $0.5 billion of borrowing capacity on unsecured lines of credit and $1 billion of borrowing capacity on a junior subordinate revolving credit facility from GM.

“2014 was a good year for our company,” Birch said at the NADA convention. “Every quarter we had improvement in volume and credit losses. The biggest thing for us in 2014 is we spent a lot of time and investment on bringing all of our systems together, understanding that we were going to get in the prime business from an APR perspective.”

Asked if the company would venture into F&I products for GM, Birch said, “We’re not doing that right now. The products out there right now are GM-based and -backed. We helped in some of the rollout of those products. Now that’s being handled internally by GM. We would expect at some point in our future, and I can’t tell you when, but there’s a natural evolution for those types of products to come back to the finance company.”

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GM Sales Jump 18.3%, Ford Up 15.3%, FCA Up 14% in January

Detroit’s automakers on Tuesday all posted strong sales increases in January compared to a year ago, led by General Motors Co.’s 18.3 percent gain — its best January in seven years, reported The Detroit News.

Buyers took advantage of low gas prices, easy access to credit and stable feelings about the economy to buy vehicles, particularly full-size trucks, crossovers and SUVs. Better weather than a year ago also seemed to aid sales, which analysts expect will come in more than 10 percent higher than January 2014.

Ford Motor Co. saw January sales jump 15.3 percent to 178,351, while FCA US LLC, formerly Chrysler Group LLC, also posted a 14 percent sales gain in January.

GM said its U.S. sales to retail customers and fleet customers increased by 14 percent and 32 percent, respectively.

GM saw big gains from its Chevrolet brand, up 20 percent; GMC was up 28.6 percent and Cadillac had a 2.6 percent sales gain. Sales for Buick fell by 5.5 percent.

The Detroit automaker was boosted by big increases in pickup sales — up 42 percent year-over-year — and sales of crossovers and SUVs jumped 36 percent from January 2014.

“Consumers feel very good because more people are working, the U.S. economy is expanding and fuel prices are low,” said Kurt McNeil, GM’s U.S. vice president of sales operations, in a statement. “Consumer and commercial demand for trucks and crossovers is really driving our business, and our move into the small crossover segment with the Chevrolet Trax and Buick Encore, and mid-size pickups with the Chevrolet Colorado and GMC Canyon, was well-timed.”

Ford said its retail sales increased by 13 percent — the best retail sales month for Ford since 2004. The Dearborn automaker said passenger car sales to retail customers rose by 6 percent, utilities were up 10 percent and truck sales rose 23 percent.

Ford sold 54,370 F-Series pickups last month, up 16.8 percent in January, marking the best January for F-Series since 2004. Lincoln brand sales also jumped 10.8 percent.

FCA posted its best January sales since 2007 with 145,007 vehicles sold last month.

“We kicked off 2015 with a 14 percent increase in sales and extended our year-over-year sales streak to 58 consecutive months,” said Reid Bigland, FCA’s head of U.S. sales, in a statement. “In spite of some tough 2015 comparisons, we remain confident in our ability to post year-over-year sales increases on the back of strong retail demand for our products.”

FCA said its Chrysler, Jeep, Dodge, Ram Truck and Fiat brands each posted year-over-year increases, led by Jeep’s 22.9 percent increase. The company said 10 vehicles set January sales records including four Jeep vehicles. Ram pickup sales also jumped 14 percent.

Toyota Motor Sales USA Inc. said its sales jumped 15.6 percent in January, as light truck and Lexus brand sales set January sales records.

“This year is off to a strong start as the sales momentum we saw in 2014 continued into January,” Bill Fay, Toyota division group vice president and general manager, said in a statement.

Nissan Motor Co. Ltd. said its total U.S. sales rose 15.1 percent in January, with its Nissan division setting a January record with 94,449 sales, up 15.9 percent.

American Honda Motor Co. Inc. said it had record U.S. sales in January of 102,184, up 11.5 percent from a year ago. Its Honda brand set a January record with 90,202 sales, up 11.6 percent, while Acura brand sales increased by 10.7 percent.

Meanwhile, Hyundai Motor America said its January sales rose 1.1 percent to 44,505 vehicles, setting a January record. Kia Motors America also had record January sales of 38,299, up 3.5 percent year-over-year. Volkswagen of America Inc. posted flat sales of 23,504 in January.

TrueCar Inc., a car-buying and -selling marketplace, said it predicts U.S. auto sales will reach nearly 1.15 million vehicles in January, up 13.2 percent from January 2014. January 2015 had one extra selling day than January 2014. Kelley Blue Book estimated a similar increase of 12.9 percent, though it noted some final selling days of the month may have been hampered by bad weather in the East.

“Full-size trucks continue to thrive in 2015 and Kelley Blue Book anticipates sales will improve more than 10 percent in January alone,” said Alec Gutierrez, Kelley Blue Book senior analyst, in a statement. “Expect a strong push from Chevrolet Silverado, GMC Sierra, Ram and F-Series, especially when taking into consideration the low cost of fuel and the appeal of these recently redesigned core products.”

Many industry forecasters are calling for U.S. auto sales to reach 17 million in 2015 after hitting 16.52 million last year, up by nearly 1 million sales from 2013.

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