Good for the General

GM deal with activist is more than middle of road

A deal with dissidents is more than middle of the road for shareholders of General Motors. The carmaker won't buy back as much stock as funds led by Harry Wilson had requested. They did, however, get 63 per cent of what they wanted and, perhaps more importantly, a commitment on how GM will allocate capital in the future. Given GM's past profligacy, that's a victory unto itself.

Wilson, who had helped engineer GM's bankruptcy on behalf of the US government in 2009, popped up a month ago asking for a board seat and a promise by Detroit's industry leader to repurchase $8 billion of stock within a year of the 2015 annual meeting. Wilson withdrew his board-seat demand on Monday, and the company agreed to buy back $5 billion by the end of next year.

If it looks like a tactical win for GM, think again. The company led by Chief Executive Mary Barra set parameters that should enforce greater fiscal discipline on the company than ever before. GM said a "foundational element of its approach will be to return all available free cash flow to shareholders" while maintaining a balance sheet, with a cash pile of $20 billion, to ensure an investment-grade credit rating.

This is as good an outcome as shareholders could have wanted. Rather than following the scorched-earth entrenchment playbook championed by attorney Marty Lipton and Goldman Sachs in response to the arrival of Wilson and the four funds he was working with - Appaloosa, Taconic, Hayman and HG Vora - Barra and her deputy, President Dan Ammann, chose a course of active engagement.

Having Wilson on the board would have been a bonus. His presence, in the form of very clear capital allocation targets, nevertheless will linger inside the boardroom like a personal trainer, keeping the company from overspending too much and reverting to its flabby mean.

Finally, having precise fiscal commitments in response to shareholder pressure gives GM a better bargaining position with members of the United Auto Workers, which owns 8.7 per cent of the stock. GM and the union, which opposed Wilson's $8 billion figure, will enter contract negotiations later this year. Wilson just gave GM some leverage, and shareholders a bonus.