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How Diligent Was GM About Its Deal With Nikola?

Timothy L. O'Brien
·6-min read

(Bloomberg Opinion) -- General Motors Co. is a storied corporation employing many experienced managers, lawyers, accountants, analysts, engineers and, of course, Mary Barra, a gifted chief executive officer.So how did it come to pass that all those smart people either didn’t foresee or more properly brace themselves for the clown rodeo now swamping its partnership with Nikola Corp.? More to the point, might it have been wiser for GM to have avoided hitching its wagon to Nikola in the first place?Barra told investors on a conference call last week that GM conducted “appropriate diligence” before entering into a high-profile partnership with Phoenix-based Nikola, a three-year-old publicly traded startup that hopes to mass-produce zero-emission trucks running on hydrogen fuel cells and rechargeable batteries. To my ear, “appropriate diligence” is to “due diligence” as “half-baked” is to “fully cooked,” but maybe I’m nitpicking.GM declined to offer details about how appropriate its diligence was other than saying it involved a “thorough review of business, legal and technical matters” at Nikola. But Barra was on the call last week because a short seller, Hindenburg Research, had published a report a few days earlier contending that Nikola was “an intricate fraud built on dozens of lies.” Hindenburg’s diligence was clearly different from GM’s.Wall Street tends to look down on short sellers because they make money when the shares of high-flying companies take a hit, and to that end they often traffic in naysaying, gossip and conspiracy theories (just like lots of other Americans right now). But they’re also cops on the beat and help keep companies honest. Hindenburg raised several issues about Nikola that writers like me find hilarious but that investors, business partners and other outsiders might, understandably, find alarming:

Trevor Milton, Nikola’s 39 year-old founder, made dozens of false statements over the years that helped him parlay what appear to be some very tall tales about Nikola’s technology, production and performance into a $20 billion stock market valuation. Turning inexpensive hydrogen into auto fuel is key to Nikola’s success, and Milton has routinely said that he succeeded at cutting the cost of hydrogen by about 81% compared with his peers and was already producing it. Neither of those things were true, apparently. Milton appointed his brother, Travis, as “Director of Hydrogen Production/Infrastructure” at the company. Hindenburg said Travis’s “prior experience looks to have largely consisted of pouring concrete driveways and doing subcontractor work on home renovations in Hawaii.” Milton claims Nikola designs all its truck components itself but it appears “to simply be buying or licensing them from third parties.” Milton once staged a promotional video of a Nikola truck cruising along a highway when, in fact, “Nikola had the truck towed to the top of a hill on a remote stretch of road and simply filmed it rolling down the hill.” Nikola appeared to have padded orders for its products, and some of its early corporate backers cashed out chunks of their stakes in the company, along with Milton himself, after Nikola went public in June. Hindenburg says that it has “never seen this level of deception at a public company.” Well, I have. So Hindenburg needs to do more diligence.

This goes on and on, but you get the picture. And you also didn’t need to wait for Hindenburg to draw that picture for you.

Bloomberg News reported in June that despite Nikola briefly enjoying a valuation loftier than that of Ford Motor Co., Milton had a history of hype behind him. That article also noted that Milton was a high school dropout who parlayed a GED into a college stint that also ended with his dropping out. He then went on to start alarm-system and online-retail ventures and run a natural gas storage-technology company before founding Nikola in 2014. (Yes, Bill Gates and Mark Zuckerberg dropped out of college, too, but not every dropout is a ZuckerGates.)The Securities and Exchange Commission and the Justice Department are now both reportedly investigating Hindenburg’s claims about Milton and Nikola. GM and Nikola’s shares have been pummeled. Milton has called the Hindenburg report a “hit job,” produced an expletive-embroidered Instagram rebuttal, and said he plans to defend himself against “false allegations” made by “outside detractors.” He also announced Monday that he’s leaving Nikola.He’ll be succeeded at Nikola by Stephen J. Girsky, and that’s interesting, too. Girsky is a former GM executive turned dealmaker who originally brought the Nikola transaction to Barra’s attention. He oversaw a $700 million investment in Nikola in March and orchestrated Nikola’s debut as a public company in June by folding it into another publicly traded acquisition vehicle he ran.Girsky also says he really values being diligent — so much so that he uses “diligence” as if it were a verb. “We showed up with an army of people to diligence this thing,” Girsky said in August of his investment in Nikola, about a month before GM announced its deal. “I don’t doubt there’s gonna be twists and turns here, but I did put my reputation on the line for this thing.”“I want to make this work,” Girsky added. “My experience with situations like this though is these guys like to run fast and I don’t want to slow them down.”If Barra relied heavily on Girsky’s judgment to plow ahead with the GM-Nikola hookup, that may wind up being problematic. After all, Girsky was hardly a passive or objective analyst of Nikola’s prospects. He had skin in the game.On the other hand, Barra struck a savvy deal, financially. GM received an 11% stake in Nikola, worth about $2 billion when the deal was struck, without putting up any cash. Nikola has to pay GM $700 million to make as many as 50,000 of its electric trucks, and GM gets to pocket the lion’s share of emissions credits earned through sales of those trucks. Detroit has also sat around alternately resenting and admiring Tesla Inc.’s ascent without taking enough risky and bold steps on its own to help make electric vehicles a reality. Barra’s partnership with Nikola was an important symbolic move, signaling an embrace of innovation and corporate responsibility around climate change.As my colleague Chris Bryant has also noted, many of the events Hindenburg cited happened in the past at Nikola, and the company’s strengths may blossom through the GM partnership.Unfortunately, how that partnership was forged and how well Barra took stock of it is something GM’s board needs to examine, in conjunction with whatever federal regulators and law enforcement officials are investigating. If Barra — and GM — are lucky, they’ll emerge from this with minor reputational damage that may eventually be forgotten if their Nikola venture succeeds.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Timothy L. O'Brien is a senior columnist for Bloomberg Opinion.

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