It was early May 2005 and G. Richard Wagoner, Jr. Chairman and Chief Executive Officer of GM and John M. Devine, Vice Chairman and Chief Financial Officer were holding tiffin to discourse the hereafter of GM. GM had late reported dissatisfactory fiscal consequences for the calendar year-ended 2004 and their fiscal bad lucks were go oning into 2005. GM reported a $ 1.48 per portion loss for the first one-fourth of 2005. It was the company ‘s worst quarterly loss in over 10 old ages. Their stock monetary value fell to a 20-year low in April and GM was calculating net incomes per portion of $ .50 per portion for all of 2005. In add-on, Kirk Kekorian, a billionaire investor, had merely announced a stamp offer for GMs stock. His offer, made through a company he controls named Tracinda Corporation, was an offer to buy for hard currency up to 28,000,000 portions of GMs common stock for $ 31.00 per portion. This stamp offer was set to run out at 5:00 autopsy, Tuesday June 7, 2005, the same twenty-four hours as GMs one-year Board of Directors meeting. During the class of the tiffin, G. Richard indicated that he wanted to be prepared for tough inquiries sure to come from outside Board members and stockholders. Wagoner was peculiarly concerned about GMs current $ .50 per portion quarterly dividend and whether or non it could be sustained during these unsmooth economic times. G. Richard asked John M. Devine, Vice Chairman and Chief Financial Officer of GM to see the on-going viability of GMs Dividend Policy and describe back to him by June 1.
General Motors: A Dividend Policy Negotiation Case ( A Negotiation Case turn toing Corporate Dividend Policy. For usage in a Corporate Policy or Case Course was prepared by Dr. Robert M. Kiss, Associate Professor of Finance, Eastern Michigan University Department of Accounting & A ; Finance, Ypsilanti, MI 48197, 2005. Work-in-progress. Not to be copied, cited, or used without the permission of writer. This instance has been prepared for academic intents. Any events presented herein are pure fiction.
That afternoon, John Devine called a meeting of his staff to turn to the concerns over GMs dividend policy. John assigned his staff to fix an analysis turn toing whether or non GM could prolong its current $ 2.00 per portion ( see Exhibit 1 ) . John emphasized to some of the younger staff members that it was really of import to see the possible reaction to a dividend cut by current stockholders and possible bidder Kirk Kekorian. Devine stated that cutting the dividend may direct a negative signal to the capital markets and topographic point farther downward force per unit area on GMs stock monetary value. In add-on, Devine mentioned that GMs recognition evaluation had late been downgraded to Speculative class ( debris position ) .
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Devine advised his staff to fix forecasted fiscal statements for the following 5-years utilizing recent public presentation as the starting point ( see Exhibit 2 ) The prognosiss should be based upon confidential corporate information that may in-part be reflected in outside analyst studies ( see Exhibit 3 ) . Surely an accurate gross revenues prognosis every bit good as estimations of operating hard currency flows would be of critical importance in back uping any recommended dividend policy.
Devine besides took a few proceedingss to pull the attending of his staff to several factors that he felt were of cardinal to the development of accurate gross revenues prognosiss. Devine mentioned that the record high energy monetary values had well effected the gross revenues of SUVs. This was taking to a backlog of stock list for GM. Devine besides cited that the demand for heavy trucks would likely go on through 2006 but may be approaching the terminal of the gross revenues rhythm. Rising medical costs for GM employees and retired persons were cutting into GMs profitableness and were estimated to be about $ 7 billion in 2005. Increased competition from Toyota and other foreign rivals was coercing GM to see downsizing non merely its labour force but besides the figure of vehicle trade names it offered. Currently GM operated 8 different divisions and was coming under increased examination from Wall Street sing duplicate of assorted administrative maps ( see Exhibit 4. ) Devine instructed the staff to at least see the impact of being able to cut wellness attention costs ; shuting, selling or unifying some of their divisions ; or selling some of their other corporate assets.
There were besides a figure of other events that were of important importance to the readying of the forecasted fiscal statements. Some of the more noteworthy factors are noted in Exhibit 5.
As the meeting ended, the staff walked away cognizing they had a hard undertaking confronting them into trying to develop the dividend policy for the universe ‘s largest car maker by May 20.
Day of the Negotiation: Dividend Policy Showing Groups
Each group will come to category and nowadays to the Board of Directors and Shareholders, at GMs one-year meeting, their recommendations sing General Motors Dividend Policy. Each group member should come prepared, to reason, support and negociate the proposed Dividend Policy for General Motors. While the concluding result of the dialogue can non be know in progress, each group showing a policy statement should come prepared with the following written drumhead.
1. A statement of the end of your group ‘s dialogue.
2. A written treatment of the dividend policy your group supports and the grounds for back uping such a policy.
3. A treatment of the premises underlying your forecasted fiscal statements. It may be wise to fix a multi-year prognosis to guarantee that your dividend policy can be maintained for 3 to 5 old ages.
4. Since this is a dialogue, each group should besides develop an thought of an alternate dividend policy to which they could back up.
5. A one page sum-up or decision of what they expect to see and larn from the dialogue and why or why non alternate policies are feasible.
Board of Directors Submission:
The entry by the Board of Directors can follow a similar format as the negociating groups with the undermentioned differences. First, since this group has the duty of finally taking a dividend policy, they will necessitate to reexamine the assorted proposals. Therefore, groups negociating should email their write-ups to the Board of Directors. Each member of the Board could so in-turn summarize ( one-page ) the assorted proposals. The Board should besides fix their ain forecasted fiscal statements and supply some indicant as to which policy they would prefer in progress. There is no ground that the concluding consensus agrees with the pre-negotiation write-ups.
Exhibit 1. Summary of General Motors Corporation Dividend Payment History.
DIVIDENDS PAID
DIVIDEND PAYOUT RATIO
2004
$ 2.00
31 %
2003
$ 2.00
39 %
2002
$ 2.00
70 %
2001
$ 2.00
NMF
2000
$ 2.00
29 %
1999
$ 2.00
25 %
1998
$ 2.00
38 %
1997
$ 2.00
27 %
1996
$ 1.60
33 %
1995
$ 1.10
19 %
Exhibit 2. Corporation Consolidated Financial Statements ; 2002, 2003 and 2004.
2A. Amalgamate Statements of Income, 2002-2004
2B. Auxiliary Information on the Amalgamate Statements of Income, 2002-2004
2C. Amalgamate Balance Sheets, 2003-2004
2D. Auxiliary Information on the Consolidated Balance Sheets
2E. Amalgamate Statements of Cash Flows, 2002-2004
2F. Auxiliary Information to the Amalgamate Statements of Cash Flows
2G. Amalgamate Statements of Stockholders ‘ Equity, 2002-2004
2H. Auxiliary Information Selected Financial Data, 2000-2004
Exhibit 3. Value Line Investment Survey Ratings and Report for General Motors.
Exhibit 4. General Motor Operating Divisions.
BUICK
CADILLAC
CHEVROLET
GMAC
Hummer
Pontiac
SAAB
Saturn
Exhibit 5. Recent economic developments sing GM.
In order to maintain gait with rapid economic developments and to integrate the dynamic environment of today ‘s competitory markets pupils should seek the web for up-to-date fiscal information on GM. Corporate information can be obtained at hypertext transfer protocol: //www.gm.com/ and hypertext transfer protocol: //www.bloomberg.com/ .
JUNE 7, 2005 TRACINDA ‘s TENDER OFFER EXPIRES
GMs ANNUAL BOARD OF DIRECTOR ‘s Meeting
MAY 9, 2005 GM DECLARES $ .50 QUARTERLY DIVIDEND
TRACINDA CORP. $ 31 TENDER Offer MADE
APRIL 19, 2005 GM REPORTS $ 839 MILLION FIRST QUARTER LOSS
*AUTOMOTIVE DIVISION LOSSES $ 1.3 BILLION
*REVENUE DOWN 4.3 % FROM FIRST QUARTER OF 2004.
*MARKET SHARE DROPS TO 25.2 % DOWN FROM 26.3 %
*AUTOMOTIVE CASH FLOW ( $ 3.0 ) Billion FOR FIRST QUARTER OF 2005.
*FLAT SALES FOR SECOND QUARTER 2005
*ANNUAL VEHICLE SALES ESTIMATED AT 17 MILLION UNITS
GM STOCK TRADES AT $ 24.67, A 20-YEAR LOW
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