Why GM's stock buyback may be very bad news

General Motors recently agreed to buy back $5 billion in shares through the end of 2016 in a move to "enable increased returns to shareholders," the automotive giant said. However, the decision hardly came out of a sense of generosity. The automaker was being targeted by a group of activist investors requesting an $8 billion buyback and a seat on the board. Now, an editorial in the Harvard Business Review has excoriated the hedge funds' actions and GM for giving in.

The editorial certainly doesn't mince words and believes that GM needs as much money as possible to compete globally. It claims that the activist investors are holding the company hostage and accuses CEO Mary Barra of not fighting hard enough. The writers also forecast this is just the beginning saying, "The pump-and-dump hedge funds will come back to GM's buyback well year after year until the cash flow once again runs dry."

Going a step further, the editorial calls for action in the future. "Taxpayers and workers should demand that open-market repurchases by all companies be banned. Stock buybacks manipulate the stock market and leave most Americans worse off," it says.

This editorial isn't alone in its argument. Analysts have made similar statements that a buyback is shortsighted.

Former Auto Task Force advisor Harry J. Wilson has been the major spokesperson for the investors pushing in this process. He has argued that GM's shares were undervalued and this buyback would benefit stockholders.

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