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Harvard Business Review Throws Up All Over Stock Buybacks
When even the Harvard Business Review throws up all over stock buybacks, you know it is only a matter of days before Obama signs an executive orders banning these for good (as he should have back in April 2012 when we explained why it is all the Fed's fault that instead of investing in growth and expansion, companies are instead cashing out their stockholders and boosting management equity-linked comp to record leves).
From HBR' William Lazonick and Matt Hopkins:
GM’s Stock Buyback Is Bad for America and the Company
General Motors’ announcement that it will settle a fight with activist shareholders by buying back $5 billion in stock over the coming 21 months is a major loss for American taxpayers and GM’s workers. The investors’ leader, Harry J. Wilson, called the deal a ”win-win outcome.” But the only real wins are a victory for the hedge funds, and a Pyrrhic victory for GM in that it managed to keep Wilson off its board and reduced the size of the buyback from the $8 billion the investors had been demanding.
In 2009, Wilson was part of a Wall Street team that the Obama administration hired to structure the bailout of GM, after the company, once the world’s largest automobile producer, sustained over $88 billion in losses in the previous four years. During the bailout, financial firms, including hedge funds, were nowhere to be found. Instead, U.S. taxpayers put up $49.5 billion in rescue funding, and Canadian taxpayers pitched in another $10.9 billion, allowing GM to emerge from bankruptcy after just 40 days. In 2010 the “New GM” did one of the largest initial public offerings in history, with share sales to the public of $23.1 billion by the U.S. and Canadian governments as well as the United Automobile Workers (UAW) through its Voluntary Employee Beneficiary Association (VEBA) Trust. By the time the U.S. government sold off all of its GM holdings in December 2013, U.S. taxpayers had absorbed a $11.2 billion loss.
The UAW made big sacrifices, allowing GM to reduce labor costs by $11 billion. There were 21,000 layoffs; a wage freeze for current workers; a halved wage of $14 per hour for non-core new hires; elimination of a funding program for unemployed workers; a no-strike agreement until 2015; and the VEBA that shifted UAW retiree healthcare and pension benefits from GM to the UAW, saving the company $3 billion per year. (In early February, a day after she met with Wilson, Barra decided to grant 48,400 UAW workers as much as $2,400 each in extra profit-sharing bonuses that were over and above the amount stipulated in the union contract. But this “Barra bonus” totals only $116 million, a pittance compared with the $5 billion that GM will spend on the buyback.)
While the restructuring certainly helped GM return to profitability (its annual net income averaged $6.7 billion from 2010 through 2013), it would probably still be bankrupt but for the booming Chinese market. In 2013 GM produced 3 million cars in China, or 45% of its global car production; that was up from 1.1 million vehicles in 2008. Indeed, in 2013 GM produced only 12% of its passenger cars and 21% of its motor vehicles in the United States.
Going forward, GM will need all the financial resources it can muster to produce automobiles that buyers in diverse global markets want at prices that they are willing to pay. In an industry characterized by intense global competition and major technological challenges, GM cannot afford to be held hostage by hedge funds in the name of “maximizing shareholder value.”
One of us (Bill Lazonick) has been extremely critical of the kind of buybacks — open-market stock repurchases — that GM has pledged to undertake. Their only purpose is to give manipulative boosts to GM’s stock price. The winners will be public shareholders, including the hedge funds, who stand ready to gain by selling their GM shares. If U.S. corporate history of the past three decades is a guide, the $5 billion in buybacks won’t be the last. The pump-and-dump hedge funds will come back to GM’s buyback well year after year until the cash flow once again runs dry.
GM did $20.4 billion worth of buybacks from 1986 through 2002. If it had saved that money and earned a modest 2.5% on it, the company would have had $35 billion on hand when the financial crisis and Great Recession hit and probably would not have had to file for bankruptcy protection. As Bob Lutz, the veteran auto executive, said recently, stock buybacks are “always a harbinger of the next downturn…in almost all cases, you regret it later.”
So why is GM risking déjà vu all over again? Surely GM CEO Mary Barra understands the deadweight loss that stock buybacks pose for her company. She has been with GM since 1980 when, at the age of 18, she entered General Motors Institute to get an engineering degree. She must know that public shareholders, including the hedge funds, whose only relation to the company is to buy and sell outstanding shares, contribute nothing at all to the creation of high quality, low-cost vehicles. One would hope that Barra’s motivation in caving in to the hedge funds has nothing to do with her $10 million in stock awards waiting to vest.
Taxpayers and workers brought GM out of bankruptcy, yet it is the hedge funds that will reap the biggest rewards. Taxpayers and workers should demand that open-market repurchases by all companies be banned. Stock buybacks manipulate the stock market and leave most Americans worse off. In this case, it is clear that what is good for the hedge funds is bad for the United States.
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this may be the most intelligent thing out of the Harvard Business Review in quite sometime.... bravo....
the synthetic bid for stocks is painting a picture with invisible ink which many do not understand or are aware of...
Sweet, does this mean GM will just buy back any cars it doesnt sell lol. PROFIT !!! Stock price up and inventory moving like mad...gotta love smoke and mirrors.
Rofl
Instead of banning stock buybacks, why don't we just end the fucking fed and let the market set interest rates like it's supposed to in a real free market. And the whole thing about them not needing a bailout is bullshit too. If there were no such things as bailouts or 'too big to fail' and companies that did stupid shit like that went bankrupt like they are supposed to then CEOs wouldnt be making risky, shortsighted decisions like this.
My way is better than Harvard business review. My way doesn't involve coercion or the govt at all.... Just honest markets that punish bad behavior on their own without the heavy hand of govt interference.
I used to think like you and then I bought a shitload of PMs. I thought I would stick it to the man. Too late for me, I made my bed. The man is the man for a reason. No point finding honor in being the salmon at a bear buffet.
Stock buybacks will end when boards of directors stop setting bonuses based on stock price and set bonuses by long-term corporate profitability.
Carl- You are talking blasphemy! Real capitalism instead of corporatism? Shame on you.
There will never be a _____ in HBR! Never be. Never be!
If GM had to buy back its lemons, it would have already been back in bankruptcy court...
"Pump and dump" is the operative phrase. If there was nay justice in the USA, those hedge fund managers would be receiving target letters for operating a RICO enterprise that pressured GM to buy back $5 billion in GM stock. But in the lawless USA, where robber barons rule, extortion by hedge funds is not a crime.
The people got the government they deserve and this is the result. Not that it is much comfort.
The FED says, "buy back your stock now. we'll give you the money". Corp excecs say, "Yes, zionist masters". and the elitist scum live happily ever after.
Stock buybacks are fine. Just because GM completely mismanaged theirs doesn't mean they are bad.
they are fine if you own the shares.. not fine if you are a college graduate looking for a job because companies are plowing all excess capital into buy backs vs expanding their business...
And it is the companies' resposibility to take care of college grads? Companies can also go down another road of stock split. The next question becomes, Why all these buybacks? How about 0% interest rates. The real problem for college grads lays in the fact they have a crony government that rewards favorite companies and squashes competition; along with a Fed that has destroyed anything resembling a true market. Fed money allows for a lot of cash growth without a lot of expense.
Please put the beer down, and step away from the keyboard.
Best advice ever.
I tell myself that every night.
But I continue to post.
The biggest reward was reaped by Barry who got the autoworker union votes.
Everyone knew that what was done for GM was contrary to BK laws.
Honestly in some cases buybacks really do make sense. GM doesn't happen to be one of those cases.
If you're running a profitable business and have nowhere to invest in capex because some other assholes broke the economy you sell your products into, once the bank balances reach a certain level it makes more sense to buy shares than anything else.
Exactly. In the old days, you would look at return on capital and invest accordingly. Returning money to investors via dividends or stock buybacks is totally appropriate. It's actually why people invest to begin with. What isn't is getting bailouts when you managed poorly.
Fucking retarded economists. Writing a negative piece on buybacks is like blaming the apple for gravity working.
well... if businesses actually hired and expanded their business vs buying back shares with all excess capital there would be a higher velocity of capital and more employed at higher wages helping to organically grow the eocnomy vs enriching insider and shareholders or those who own fractions of shares in their 401k's ....
I just dropped my apple and fell up.
Ask yourself why what you are proposing is or is not occuring.
These under qualified lock-step tenured statist CEO's should not be allowed to enrich themselves from the mountains of Keynesian propaganda the educational system has bestowed upon them extracted from the taxed labor of the masses!
Wait, wut did I just say? ;-)
Don't forget with your health insurance, you finance their stock buy backs too as all the big guys are on the S&P 500 which Bloomberg said spends 95% of their profits on buy backs.
This might also explain the extreme creation by insurance quants of even narrower networks. In some companies people lose jobs to stock buy backs but in the health insurance business, they lose their doctor, so can't blame that one totally on Obama:)
http://ducknetweb.blogspot.com/2014/12/insurance-carrier-stock-buy-backs.html
On Q99X2 we banned stock markets shortly after computers came out.
You were on the right track, but you threw out the baby with the bathwater. Ban M&A activity when a company reaches an asset size of about 1 basis point of GDP. Ever wonder why you have to actually search to find small caps doing stock buybacks? (as well as other activities which bring to mind lamp posts and rope?)
When money is free under ZIRP, it's different this time.
The only question is how to unwind a wild ZIRP. Scientists are studying the issue as we speak.
taking it private is my guess. the endless facist future is what the planning is based on. so, buy your stocks accordingly.
I used to despise stock buybacks for what they are. But now I realized it is public looting of corporations. That money is for the taking for anyone who can buy stock. Now you don't even have to be an insider to loot corporations. I don't get all the hate on here.
Plus a milllion.
You seem like a guy who can tell the difference between an apple and gravity.
This is "their" form of survival of the fittest. Regrettably, it means tightening the shackles around 90% of humanities neck and pushing things toward a zombie apocalypse. I guess it's all in a days fun :-( Sorry, Jefferson called it long ago.
Do we STILL not get it? The problem is NOT the share buy-backs, dividends or excessive CAPEX. IT'S BAILING THEM OUT AFTER THEY IMPLODE FROM THESE DECISIONS THAT IS THE ISSUE.
Stop rewarding bad behavior with tax payer money so they're not about to just do it over again.
Merely the executives of corporate America LOOTING their companies (essentially using money from the company to paying themselves worthless stock options that they "make" valuable by using the companies free cash to jack up the share price).
Many people are also unaware that these very same execs get "commissions" for buying OTHER companies (whether there is ever a net gain profit for their company or not). They get a "piece" of every acquistion based on the TOTAL AMOUNT OF THE SALE, which is obviously not conducive to effcient market pricing, but rather makes it beneficial to OVER PAY for them. And buying companies they shouldn't even buy. (See: Carly Fiorina who made millions for her brilliant acquistion of Compaq for HP, in the face of the secular decline of desktop computers).
Of course CEO's DESERVE more money than you, because they are smarter than you.
Profits are kept private, losses are shared with US citizens.
Why doesn't big GM split up in many little gm's. It' good for stock value. OK overhead cost will skyrocket but that's something for the future. In the future hyena hedge funds can buy them up, steal the pension funds and liquidate the whole shebang. Their business plan is based on suicidal fraud anyways so why don't go all the way. Why so serious? https://s-media-cache-ak0.pinimg.com/736x/f6/12/1c/f6121ccd514a477574abc...
Oh, critics of stock buybacks, why do you hate America? Every dollar fed back to hedge fund oligarchs creates dozens of jobs, the WSJ tells me so.
excellent