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Innovation Desperation: GM Overpays for Self-Driving Car Startup

Monday, March 21, 2016 6:22
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The Wall Street Journal recently reported that General Motors has paid over a billion dollars in cash and stock to acquire Cruise Automation, a San Francisco startup company that designs self-driving software. The technological and regulatory obstacles facing autonomous driving development are huge, but don’t expect that to stop GM from throwing billions of shareholder dollars at the latest hyped wonder-technology.

Cruise Automation is a small firm that employs about 40 people and has no major sales revenue to speak of. That works out to GM paying about $25 million per employee. The billion dollar company, however, is reported to be growing quickly with plans to hire another ten people.

The idea of GM wantonly spending $1 billion for the start-up brings to mind the costly Chevy Volt folly which saw a multi-billion dollar investment in an infeasible technology reap no rewards for GM shareholders. Even with billions of dollars of taxpayer-supplied subsidies, the Volt was unable to come close to living up to the rosy projections by GM that the car was going to be a savior for shareholders while helping to save Mother Earth. The Chevy Volt hype was at its peak (not by mere coincidence) as the company lobbied the Obama Administration to fund its operations with taxpayer money.

GM is now, once again, freely spending the remainder of taxpayer supplied money that was given to the company in the form of a roughly $50 billion bailout leading up to its 2009, Obama-orchestrated bankruptcy. While much of that cash hoard was spent protecting the interests of Obama’s friends at the UAW during the bankruptcy process, GM had made a commitment to maintain at least $20 billion in cash while remaining debt-free so that eventual market cycle downturns can be weathered. The company has been unable to do either which leads one to wonder if the latest self-driving hype is a Voltesque red herring designed to divert attention away from managements’ inability to bring value to shareholders or pure desperation of a management team that is unable to figure out how to remain competitive in conventional automotive technologies.

GM recently rose about $2 billion worth of debt to help fund operations. It now sounds like additional common shares will be used to fund part of the Cruise Automation purchase. The fact that GM has been raising dividends and buying back billions of dollars of stock while offering new debt should be concerning in addition to be confusing. If the company is so cash-rich, why can’t they afford to pay all cash for the latest acquisition? Why are they, once again, going into debt when they should be keeping the balance sheet as strong as possible to prevent a 2009 type downturn?

The auto industry is both highly cyclical and highly competitive. If GM is not operating at high margins and building cash reserves during the best of times, think about how ugly things are going to get when an inevitable auto industry downturn comes. That is why GM share price is still trading below its 2010 IPO price of $33 and has trailed the broader markets by about 70% since then.

Self-driving technology investment will not be accretive to profits for many years, if ever. GM shareholders should be very concerned about the continued undisciplined spending which is more typical of the US Government than of a publicly traded corporation as GM continues to exhibit its Obama Administration DNA with no regard to financial responsibility. It is just a matter of time before GM will lose the luxury of operating in a forgiving auto cycle bubble. The true effectiveness, or lack thereof, of GM’s management will be revealed during the next auto cycle downturn.

In photo: Cruise Automation co-founders Daniel Kan and Kyle Vogt, along with GM President Dam Ammann.

Mark Modica is an NLPC Associate Fellow.      


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