GMH & Smart Money Article:
(Thanks to post 231 of the GMH thread! Thank you!)
Taken from Smart Money:
By Russell Pearlman
Perhaps J. Micheal Losh didn't like the idea of living on Pepto Bismol for the next several months. The chief financial officer of General Motors (GM) announced he was leaving the company last week, after six years as CFO and 34 years as an employee of the world's largest corporation.
He couldn't be departing at a more pressing time. As CFO, Losh would've dealt with several important financial decisions facing the car company, including: whether to spin off the company's Hughes Electronics (GMH) unit; how to fight off corporate troublemaker Carl Icahn; whether to keep navigation system OnStar inside GM's corporate hat; and how to handle a potential full buyout of Fiat.
You can't blame him for leaving, especially after dealing with the stock buybacks, company spinoffs, worker strikes, corporate politics and other goings on he's encountered over the last six years. Investors, however, should keep a keen eye on whom the car company chooses to replace Losh. That person may very well determine the direction of the company's stock price over the next six to 12 months. And that could be worth billions.
Losh's departure wasn't unexpected. After new GM Chief Executive G. Richard Waggoner took over in June, it was anticipated he would hand pick his own management team. He hasn't found a new CFO yet, but John Finnegan, chairman of General Motors Acceptance (the outfit that lends you the cash to buy that Saturn) has been appointed as an interim replacement.
When a new CFO is found, his first priority will be to figure out how to structure a deal for Hughes Electronics. You see, GM has a problem: many of its investors couldn't care less about cars and trucks. Instead, they're interested in Hughes, the $5.6 billion satellite company that GM partially owns and completely controls.
Using a little bit of financial math (see the sidebar), Hughes in theory should account for anywhere from $17 to $24 of every GM share, while Hughes' tracking stock sells at about $33 a share. Unfortunately, Hughes' value is not reflected in GM's $72.38 stock price. Investors, who wonder why a car company continues to own a satellite operator and entertainment-programming service anyway, want GM to either finish spinning off Hughes or sell it to a company like News Corp. (NWS) or another tech-savvy communications firm. If GM sells Hughes, it'll be up to the CFO to figure out how to structure the deal to maximize shareholder benefits and minimize corporate tax liabilities. And if GM decides to keep Hughes, the new CFO will have to convince institutional investors why it's a good idea. They'll likely need lots of convincing.
The presence of corporate-raider extraordinaire Carl Icahn, ironically, simplifies matters. GM's announcement that Icahn would be buying more than $5 million, but less than 5%, of company stock convinced a lot of other investors there was more value to GM than currently reflected in its stock price. Investors have run up GM's stock about 14% since Icahn's move was announced Aug. 18.
Though he's not talking about his intentions, Icahn could be looking to reshuffle the company's management. But GM's difficult-to-manage business, unionized workforce, and $37 billion-plus price tag are reasons Icahn might want to just rattle GM's cage, not tear it apart.
And if the CFO has some spare time, he or she might want to figure out how to solve GM's ongoing problems with its car business. If the CFO advocates shutting down some divisions, he or she will have to convince not only the CEO — but many of GM's 400,000 employees. Union squabbles and management disgruntlement could ensue. Better bring a flak jacket.
One more long-term issue for the new CFO is a huge cash payment to Fiat's (FIA) Agnelli family. If the family that holds a controlling interest in the Italian auto maker wants to sell its remaining stake of Fiat to GM by 2004 — something they could force on GM thanks to a deal completed earlier this year — it could cost GM more than $9 billion, or a year's worth of capital expenditures. Guess who gets to figure out how to pay for that outlay?
You have to wonder whether prospective candidates will think the job is worth the grief. Losh let it be known he had wanted to leave by the end of June, but stayed through last Friday to help the company out. That grace period gave GM a few more months to find another executive, either by promoting someone inside the company (often an auto maker's preferred choice) or luring someone from the outside. Analysts suggest that the person who got the interim job, GMAC's Finnegan, would make a very good CFO. But Finnegan probably doesn't want the gig full-time, or there would have been no "interim" label.
Chuck Carlson assumes the company is now looking for an outside candidate. Carlson, the co-manager of the Strong Dow 30 Value Fund, says if the company now picks a current GM employee, it'll likely cause some head scratching among Wall Street analysts. Either way, expect grumblings if the company doesn't name a new CFO by year's end.
Despite all the hardships, the CFO position at GM isn't without its rewards. Let's start with the cash. In 1999, Losh made $835,000 in salary, received a $1,593,000 bonus, and got options for 96,160 shares. He owns 34,613 shares of GM common stock and 11,125 shares of Hughes' tracking stock, a package worth nearly $3 billion. What's more, GM will likely sweeten the pot for a new hire. No one knows just how much, but when Lucent Technologies (LU) hired former GM exec Deborah Hopkins away from Boeing (BA) to be its CFO, the company gave her $4 million in cash and 650,000 stock options — up front.
Not to mention that there's a great deal of prestige being bean counter No. 1 for the world's largest company. A successful tour of duty as GM's CFO would make anyone a good candidate for CEO-dom at another company.
Wall Street's attention has been somewhat diverted from GM thanks to Ford Motor's (F) little tire problem. But Icahn's announcement has thrown the spotlight back onto the company. And now, the investing audience is eagerly awaiting a CFO who can work a little financial magic.
Look! In the Trunk! A Satellite!
So why are folks buying GM stock when they're really interested in Hughes? Because buying a GM share is a cheaper way to get Hughes than investing in the company itself — assuming GM will eventually spin off its ownership of Hughes to GM shareholders. Here's the math:
Hughes trades at about $33 a share. Multiply that by 873.4 million shares outstanding and you get a Hughes market capitalization of about $28.8 billion.
GM, which trades at around $73, still owns 32.7% of those Hughes shares, or $9.4 billion of its market cap. Divide that by GM's own 536.5 million shares outstanding, and you get about $17.50. That's the price of a Hughes share buried in each GM share. But because analysts say GM stock doesn't reflect the value of Hughes, investors essentially get that stake for nothing.
And most analysts believe Hughes would be worth more — anywhere from 25% to 50% more — if it's spun off or bought out. A 50% premium would value Hughes at more than $26 a GM share. |
