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GM in standoff with billionaire hedge fund investor

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Latest MoneyWatch headlines 01:03

DETROIT - General Motors (GM) is under pressure from billionaire hedge fund investor David Einhorn to boost its stock price, which has idled in recent years.

The auto giant said Tuesday that it has rejected a proposal from Einhorn’s Greenlight Capital to split its stock into two classes. Under the non-binding plan, GM would eliminate the dividend on its existing common stock and create a separate dividend-paying security.

The New York-based hedge fund intends to submit the proposal at the GM annual shareholders’ meeting later this year, where it will also nominate four candidates for GM’s board.

The plan would lower the company’s cost of capital and unlock $13 billion and $38 billion of shareholder value, Greenlight Capital said, according to Reuters. “Our plan ... would provide the company complete strategic flexibility without adding any default, refinancing, or balance sheet risk,” Einhorn said.

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A message was left Tuesday seeking comment from a Greenlight spokesman.

GM said in a statement Tuesday that Einhorn’s proposal creates “unacceptable risks” and is not in the best interests of shareholders. Among the risks are the potential loss of GM’s investment grade credit rating, unknown market demand for the new securities that could depress prices, and corporate governance challenges that would come from having two classes of stock with competing objectives.

GM said its management has spoken with Greenlight numerous times during the past seven months, including a meeting between the hedge fund and GM’s board. The Detroit automaker said it consulted with ratings agencies and conducted a review with three investment banks.

“For seven months, we’ve extensively reviewed the proposed dual-class structure, as well as other capital allocation strategies, and concluded that continuing to execute our strategy and adhering to our current disciplined capital allocation framework is the best path to deliver increased value,” GM Mary Barra said in the statement.

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Einhorn, who started Greenlight in the mid-1990s, is among the most widely followed hedge fund managers. Although the fund invests in many companies, Einhorn is best known for betting against the stock of companies the firm believes are overpriced. In 2008, he famously predicted that Lehman Brothers was likely to fail only months before the investment collapsed in the early days of the housing crash. Among his other targets have been Allied Capital, Caterpillar and Green Mountain Coffee.  

Shares of GM were up 2.8 percent to $35.70 in afternoon trading. 

GM reported that its net profit in 2016 fell nearly 3 percent, as sales in the U.S., its biggest market, flattened. Lingering economic weakness in other key markets, including Europe, have also restrained GM’s growth. The company, which emergedfrom bankruptcy in June of 2009 after receiving a massive government bailout, said in February that it expects to generate a pretax profit of $6 to $6.50 per share in 2017.

The automaker expects to return about $7 billion in cash to shareholders in 2017, bringing total cash returns to about $25 billion since 2012, according to Reuters data.

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