In signing a sweeping $975-million accord to mend a contentious dispute with its largest shareholder earlier this week, General Motors may have struck a financial blow at thousands of employees of its Hughes Aircraft subsidiary.
"It looks like the little guys got left out," one knowledgeable Hughes insider said.
GM announced Tuesday that it had agreed to a major restructuring of its 1985 acquisition of Hughes Aircraft from the Howard Hughes Medical Institute, the previous sole owner of the Los Angeles-based aerospace firm.
That agreement, however, did not specifically cover Hughes Aircraft or other GM employees, even though they constitute one of the largest groups of individual holders of a special class of GM stock known as GM H. The auto maker created H-class stock and issued most of it to the medical institute to help finance GM's $5.2-billion acquisition of Hughes four years ago.
Since then, however, many employees have chosen to receive H stock in various company incentive and savings plans in the belief that they could piggyback on a stock price guarantee that GM gave the medical institute. But the guarantee was nullified by the restructuring agreement announced Tuesday.
As a result, GM H stock has dropped sharply this week. Moreover, securities analysts say the stock is still overvalued and could drop even further, eroding the value of Hughes employees' retirement and incentive accounts. It closed Thursday at $25.375, down another 62.5 cents.
In an interview earlier this week, GM Treasurer Leon Krain said the company is "responsible to all stockholders to make sure they are fairly treated" and that employees "don't constitute a special class of stockholders."
Krain asserted that the restructuring plan is beneficial to all shareholders, including employees. But GM agreed to buy 35 million H shares from the medical institute for $975 million, which amounts to $27.86 or 9.8% above the current trading price. Krain said the payment is part of a package that included other concessions, however.
In addition, Hughes Vice President Lucius Gregg said Thursday that the revised agreement will benefit employees in the long term by creating a more orderly market for H shares. "It is in GM's interest to keep the value up," he added.
GM will not say how many of the 27 million H shares in public hands are owned by employees. GM itself owns 308 million H shares and the medical institute owns 64.5 million.
Based on GM financial disclosures, company executives hold at least 9.7 million H shares, not counting those in employees' savings plans. That represents about 36% of the publicly held shares.
A lot of stock was issued for only $20.03 a share to employee savings, bonus and incentive plans, so employees may not be losing money even at current prices. But until this week it appeared that the stock would be worth $30 a share at the end of this year.
That is because GM had guaranteed to the medical institute, as part of the 1985 purchase of Hughes, that the H stock would trade at $30 a share at the end of 1989 or that GM would make up the difference up to $2 billion.
The sudden nullification of that guarantee, even though it was never officially extended to employees, could depress the price of H stock.
GM has helped to prop up the value of H shares by purchasing shares on the open market. During the last two years, the company has purchased 3 million shares. That represents an average of about 6,000 shares every business day.
Since trading volume is frequently under 12,000 shares per day, GM has essentially been the biggest buyer of its own stock. GM spokesmen declined to discuss these trading activities.
But Krain, the GM treasurer, said, "I am totally against the assertion that we propped up the stock."
Nonetheless, Krain said the automotive giant would continue to buy back its H shares. At the same time, GM pledged in its restructuring agreement to increase public holding of H stock to 50 million shares by 1994 to help create a viable market.
It is not clear how GM can repurchase shares while also increasing public ownership by 23 million shares. Krain acknowledged that there is an apparent contradiction, but said the decision to sell or buy shares is a "matter of timing."
Securities analysts are uncertain why GM would be buying H shares now in any case, since it appears that they are overvalued.
Two of Wall Street's leading experts on H stock, Paul Nisbet of Prudential Bache Securities and Jack Modewleski of Paine Webber, both estimated that H shares are worth no more than $20 on their fundamentals.
In an advisory to Paine Webber clients, Modewleski wrote earlier this week, " . . . the current agreement eliminates one of the primary reasons for holding GM H stock--that somehow the $30-per-share guarantee to the institute by GM would also benefit the other shareholders."
Most of the H stock held by employees was issued as part of an extraordinary $250-million incentive plan set up in March 1985, which itself has left bitter feelings among many Hughes management and technical staff employees who are unhappy over how the money was distributed.
The plan is known as the Long Term Incentive Plan (known inside Hughes as "L-Tips") and included 1,000 Hughes senior employees. The fund was charged against earnings that year, resulting in a loss the first year that GM owned Hughes.
In 1986, L-Tip participants were allowed a one-time opportunity to convert their awards into GM H stock. They received a total of 7.4 million H shares, according to a footnote in GM Hughes Electronics Corp.'s annual report. GM Hughes Electronics is the GM subsidiary that includes Hughes Aircraft.
The 7.4 million shares are being distributed in three equal annual installments, the first being last year. The second installment of about 2.5 million is due this month and the final installment in March, 1990.
At least some of the selling pressure on GM H has come from L-Tip shareholders, according to members of the plan, and the additional 2.5 million shares about to be issued could increase that pressure.
(The effect may be mitigated by a provision under which GM may buy L-Tip shares directly from employees at the average market price in the 20 days preceding the award. But GM officials declined to discuss those details.)
Many L-Tip participants are unhappy about the awards because they believe that the very highest executives have received a disproportionate share of the money.
The fund was described in 1985 as an incentive for key scientists and engineers to stay with Hughes for at least three years. But it has since become apparent that another purpose was to reward top executives, many of whom were ready to retire.
Interviews with several participants in the L-Tip program indicate that the 27 corporate officers of Hughes Aircraft may have received as much as $100 million of the $250-million fund.
GM disclosed in 1985 that former Hughes Aircraft Chairman Allen E. Puckett, for example, received $6.5 million. A group of other top officers, including group presidents and top corporate staffers, received $3 million each, according to knowledgeable sources. Meanwhile, many lower-ranking scientists and engineers at Hughes received awards of $50,000 each.
"I was personally disgruntled," one scientist said. "It was a situation where the first guy at the dinner table took a heaping helping of mashed potatoes, and the next guy took what he wanted, and by the time the potatoes got to the end of the table, there wasn't much left."
Another former executive observed, "It was a gift horse, so how could you complain? But once people found out how much the guys at the top were getting there was a lot of disgruntlement."
Hughes Chairman Malcolm Currie sharply disagreed with that assessment in an interview last October, saying that senior management pushed for broad participation.
"The real intent of it was to build for the future," Currie said. But he acknowledged that the plan also sought to reward past service of senior executives.