Biggest Holder May Try to Push Down Price of GM Stock

In a financial maneuver that would rank among the strangest ever seen on Wall Street, the largest owner of General Motors stock may be preparing to drive down the price of its own shares.

The unusual tactic appears to be part of a larger falling out between GM and the Howard Hughes Medical Institute, which sold Hughes Aircraft to the auto maker in 1985 for a combination of cash and special stock.

The stock, known as H class, has already fallen 7.6% this month in trading on the New York Stock Exchange, raising the possibility that the medical institute, located in Bethesda, Md., has already begun an effort to bring down the price.

Meanwhile, securities analysts have disparaged the stock. Paul Nisbet of Prudential-Bache wrote that GM may be acting “illegally” and has advised investors to bail out of H class shares. “We think it is a bad investment on its fundamentals,” said Paine Webber analyst Joseph Campbell.

In undercutting the value of its own shares, the medical institute would seek to trigger provisions of a complex price guarantee that GM made when it bought Hughes Aircraft for $2.7 billion in cash and 100 million shares of H stock.

Relations Cold

Under terms of the guarantee, if the stock falls below $30 a share during the last three months of 1989, GM could be liable for up to $2 billion in payments to the medical institute to bring the value of its shares up to the $30 level. The shares closed Thursday at $27.50 on the New York Stock Exchange.

“GM is scared to death it’s going to get stuck paying the guarantee,” said one authoritative source knowledgeable about GM. “That’s the last thing GM wants to do.”

Relations between GM and its largest investor have grown icy over the last three years. GM is seeking a rebate on the price it paid the medical institute for Hughes Aircraft because of losses on some government contracts that originated before GM bought the company.

That legal move has been termed “unseemly” by Irving Shapiro, a key trustee at the institute, who made public last week the growing strains in the relationship.

GM officials declined to be interviewed for this story. A list of questions submitted by The Times earlier this week went unanswered until late Thursday and then GM answered only two questions about the number of H shares outstanding.

Medical institute administrators also declined to answer questions, even after Shapiro’s comments were published.

Shares Thinly Traded

The medical institute is apparently worried that the price of H shares will collapse immediately after the guarantee expires, leaving it with a big loss.

The collapse would occur because H shares are vastly overpriced, analysts say, largely due to GM using its financial might to prop up the price to avoid paying the guarantee. The shares are thinly traded, with only several thousand shares changing hands on some days, which makes controlling the stock all the easier for GM.

In last week’s interview, Shapiro, who is chairman of the medical institute’s finance committee besides being a trustee, said the trading price of H shares is artificial.

“There isn’t any real trading,” he said. “There isn’t a liquid market. You have GM in the market most days to keep prices up. That tactic won’t work, and I think they recognize that.”

Shapiro added, “We have the remedy. The remedy is to sell shares.”

The medical institute owns 99.5 million shares and the public owns about 28.7 million, according to GM. Until now, the medical institute has been sharply restricted in selling its shares. That is because, under the original agreement with GM, the institute’s shares are unregistered and cannot be traded on organized exchanges under Securities and Exchange Commission rules.

“After Dec. 22, we can sell every share we have got,” Shapiro asserted. “They are free of all restrictions as of Dec. 22.” GM declined to answer questions about whether the restrictions come off at that time or not.

Although he declined to say whether the institute intends to sell the shares, Shapiro speculated that it would take 10 million to 20 million shares to create a liquid market.

Odd Behavior

So far, Shapiro said, the effect of GM buying the thinly traded stock is to create a lofty premium on H shares above comparable aerospace industry shares, based on a measure known as the price-to-earnings ratio. GM declined to answer questions about the valuation of H shares.

Securities analysts agree with Shapiro that H shares do not seem to be behaving rationally.

Nisbet of Prudential-Bache issued a report earlier this year asserting that the stock was overvalued because GM “has more influence on its price than does the outlook for GM Hughes Electronics fundamentals.” It is the earnings of GM Hughes Electronics, the GM subsidiary that includes Hughes Aircraft, on which H class stock dividends are based.

At the current price, H stock is selling at a 77% premium to other aerospace stocks, based on the Standard & Poors Aerospace Group’s price-to-earings ratio, Nisbet said.

In a very sharply worded report, Nisbet noted that the H shares are very thinly traded, at least in part because of GM strategy. GM had agreed in 1985 to issue 20 million H shares to the public by distributing 15 million shares to GM common shareholders and an additional 5 million in a public offering within three years.

The three-year period expires next week and GM has apparently never held the public offering. GM declined to answer a question asking whether it satisfied the requirement or not.

Indeed, GM has actually reduced liquidity by buying back millions of the shares that the public holds. According to Nisbet, GM believes it satisfied the requirement for the 5-million-share public issue of stock by splitting the existing H class shares 2-for-1.

“This move, which appears to be skirting at least the intent of the purchase agreement, may be illegal,” Nisbet said in his report.

Paine Webber’s Campbell also is sharply critical of GM’s behavior in the marketplace.

“I think the Howard Hughes Medical Institute is being mistreated,” he observed in an interview. “GM’s actions have been far from the spirit of the agreement and close to the legal edge.”

Campbell said the medical institute faces a tough fight in getting the full $30 for its shares.

“Shapiro hasn’t called their bluff yet. He needs to tell them that if they want H stock, he will sell it to them at $30,” he said.

“What would happen if GM is only willing to pay $25? Then, the stock would fall,” Campbell said.