Peace for a Price at GM

By Janice Castro

They were the odd couple atop the world's largest industrial corporation. One was a consummate organization man who had risen fast by mastering the bureaucracy of a giant company, the other a feisty free spirit who had built a billion-dollar firm from scratch. For two years everyone had wondered what would become of the uneasy chemistry between General Motors Chairman Roger Smith, 61, and H. Ross Perot, 56, the company's largest shareholder.

Last week the answer came: an explosion that hurled Perot off the GM board of directors and into the headlines. At a session that Perot agreed to skip, the other members of the GM board voted unanimously to buy back his 11.3 million shares of company stock for $700 million. In effect, they told the brash Texan that he could take his money and his loud mouth and go away.

Yet the partnership had once seemed so promising. Both men shared the same vision and goal: to use technology to thrust General Motors boldly into the 21st century. When GM in 1984 bought Dallas-based Electronic Data Systems, the computer-services firm that Perot had founded, Smith was trying to inject high-tech know-how and a can-do spirit into a stodgy company. But the job of grafting an entrepreneurial operation onto a highly departmentalized, regimented and unionized organization proved to be more troublesome than anticipated.

More important, Perot demanded much greater autonomy for EDS than Smith was prepared to grant. When Perot became impatient with the pace of change at GM and began carping publicly about the need to "nuke the GM system" and "teach an elephant to tapdance," the clash of personalities and cultures became increasingly intolerable. Ominously for Smith, the dispute threatened to escalate into a battle for control of GM. Says a source close to the conflict: "The question for the board was how it could have good corporate governance with two chief executive officers."

Perot's sudden resignation from the GM board and from the chairmanship of EDS created an instant uproar and raised new uncertainties about the future of the troubled company. Wall Streeters questioned the economic wisdom of GM's paying so much money to jettison an in-house critic. Pundits quipped that Smith had paid a hefty "ransom" to free himself from his adversary--a reference to last week's revelations of Perot's financial support for National Security Council efforts to ransom American hostages held in Lebanon. One of Perot's assistants dubbed the GM payoff "hush-mail." Shareholders, meanwhile, were outraged that GM paid about $60--or twice the going market rate--for each of Perot's series E shares. One stockholder, Abraham Duman of Highland Park, Tll., filed a suit against GM, claiming that its directors had violated their fiduciary responsibility by paying such an enormous sum to Perot.

The timing of the deal could hardly have been worse: GM is coming off a third quarter in which it suffered an operating loss of $338.5 million, and it has announced a drastic slimming-down program that will close ten plants and part of another over three years, affecting 29,000 employees. Last week, just after GM handed over nearly three-quarters of a billion dollars to Perot, the company announced that its November sales were down 9.4% from the same month a year ago. As a result, the company said it would scale back production in three more plants in the coming months, laying off another 4,500 workers out of its current payroll of 812,000.

Many GM watchers were surprised that a gutsy character like Perot seemed to back away from a fight. But Perot maintains that he never wanted to take charge of GM. This year he came to believe that his differences with GM's management were irreconcilable, and he decided that getting out would be preferable to being caught in a dispute that, as Perot put it, "drags on and drags on." It was he who first broached the idea of the buyout last June. The idea was discussed briefly and then dropped.

But the atmosphere at GM did not improve, and Perot's lawyer brought up the buyout again in November. If Perot eventually had to go, he wanted to be sure that he got his money before the beginning of 1987, when tax reform would raise the rate on capital gains. By this time, GM was more than eager to get rid of Perot. The directors had even con sidered dismissing him from the board without buying his shares, but rejected the idea because, according to a source close to the deliberations, they feared a "bloody civil war." On Nov. 25, after 2 1/2 weeks of negotiations, Perot and GM settled on a price for his shares and worked out the details of the deal. One of the more curious terms was that Perot agreed not to criticize GM in the future, under penalty of a $7.5 million fine. Infractions would be judged by a three-person committee, comprised of Perot's personal attorney, a GM executive and a third party agreeable to both sides.

Perot already seems in danger of having to pay the penalty. After the agreement was announced, he appeared to have mixed emotions and maybe even some second thoughts. At a press conference in Dallas, he declared that the buyout was "morally wrong." Said he: "$700 million will buy you a brand spanking new world-class, state-of-the-art car plant and the jobs to go with it." Perot said he would put the money in escrow for two weeks to allow GM's directors time to reconsider their decision, but the board said it had "no intention" of doing so. In any case, Perot maintained that his departure would not solve GM's problems. "GM shot the messenger," he told TIME.

At the heart of the dispute was the relationship between EDS and GM. The two have become closely linked: EDS runs all GM's computerized operations, from processing paychecks to programming robots on assembly lines. But in the original merger agreement Perot had insisted that he and EDS be granted a highly unusual degree of independence. He did not want the parent company to audit EDS. Moreover, he demanded that EDS be allowed to maintain a different pay structure from GM's--one that called for greater variation in salaries and bonuses, to give EDS employees better incentives for good performance. It galled top GM officials that some of their EDS counterparts were making more money than they were. Finally, some GM units thought that EDS was charging the parent company too much for computer services. "The fundamental problem," said a member of GM's board, "was that Ross could never accept the fact that he had sold EDS and would not be able to maintain the level of autonomy that he was used to."

For his part, Perot became publicly critical of a management philosophy that, he believed, put too much of the burden of cost cutting on blue-collar workers while preserving such executive perquisites as private dining rooms and chauffeur-driven limousines. Chairman Smith fired back with some broadsides of his own. Perot's office, he complained to the Detroit Free Press, "makes mine look like a shanty-town. He has a Gilbert Stuart painting hanging on the wall." Said Smith: "[Perot] is a different type of guy than we are in GM. He is very independent. He is the type of guy that would saddle up his horse and ride to Iran to rescue people."

Some industry experts thought that Smith was justified in driving Perot away. Said Bernard Addo, an auto analyst for Manhattan's Argus Research: Perot may have been a skillful entrepreneur, but entrepreneurship and team management are two different things. Perot was hurting GM's stock by publicly bashing the company's management." Other observers were appalled at the buyout. GM officials got rid of Perot, contended Mary Anne Devanna, director of research at the Columbia Business School Management Institute, "to protect their own hides. Their careers, big bonuses and fancy perks all depend on maintaining the status quo. GM is in trouble, and sooner or later it will have to find a Ross Perot to dig itself out of its problems." Keith Grain, publisher of the weekly Automotive News, seemed disappointed at the turn of events. Said he: "It's a sad day for GM. Ross Perot up to now was a hero to the common man, but he's just had his mouth stuffed with millions of dollar bills."

GM may not have heard the last of Perot. Although Lester Alberthal Jr., the president of EDS, has now been named the new chief executive to run that company, Perot will stay on with the title of founder. He intends to keep an office in Dallas and an eye on things. "I'll be here as long as they need me," said Perot. GM may fear that if it shoved Perot completely out the door, many important EDS executives would follow.

No longer, though, will Perot sit on GM's board and offer suggestions on how to manufacture cars more efficiently in the high-tech age. With or without Perot, the biggest challenge facing Roger Smith remains the same: to prove that he can turn around GM's sagging fortunes.

With reporting by Reported by William J. Mitchell/Detroit, Richard Woodbury/Dallas