GM Asked to Create Two Classes of Common Stock

Activist investor David Einhorn says General Motors Co. should bolster its stock price by dividing its common shares into two types. One would pay dividends as usual, and the other would distribute remaining earnings to its holders.

Einhorn’s Greenlight Capital Inc. believes the scheme would attract investors willing to bet on potential earnings growth, thereby hiking GM’s market capitalization from $52 billion today to as much as $38 billion, The Wall Street Journal reports.

GM describes the idea as unprecedented, untested, unacceptably risky and not in the best interest of its shareholders.

The newspaper notes that GM has enjoyed seven years of continuous growth and two consecutive years of record operating profit. Yet its stock price has increased only 6% since 2010, from $33 per share to yesterday’s closing price of $34.71.

Sources tell the Journal that Einhorn estimates the two classes of stock would trade at $17-$22 and $26-$28. Greenlight Capital owns about 1% of GM shares.

Einhorn asserts that GM management is doing a good job, and his scheme wouldn’t change the company’s capital spending strategy. But like other investors, he is frustrated that Wall Street is ignoring the company’s earnings potential. The Journal says analysts want to see if GM can remain highly profitable even when car sales soften.