GM: Furniture into the fireplace
Just a week ago, General Motors sold most of the home mortgage assets of its General Motors acceptance Corporation (GMAC). The deal, for $9 billion, was with a consortium of private equity groups.
Now, GM is selling the majority stake in GMAC itself, including the auto loans, to yet another equity consortium, this one led by Cerberus Capital Management. The deal starts at $8 billion in cash, and eventually yielding up to $14 billion.
GM is clearly trying to stave off bankruptcy, but in doing so, it is selling off the majority of its only profitable division. As a New York Times article points out ("G.M. to Sell Majority Stake in Finance Unit", 4/3/06):
GMAC has been a lone bright spot for G.M., providing badly needed income as it reported deep losses at its automotive unit. Last year G.M. lost $10.6 billion, which would have been even more had the company not earned $2.4 billion at GMAC.
The sell-off is part of a series of steps GM is using to counter its growing losses. In 2003, the company sold off Hughes Electronics. In 2004, it sold its 20% share in Italian automaker Fiat. It has sold its minority position in Suzuki Motors and Fuji Heavy Industry (Subaru), much of the latter to rival Toyota Motors. It is reportedly selling its share in the Isuzu motor company, perhaps to Mitsubishi. Its Saab division is rumored to be for sale. It's once-proud auto empire has crumbled.
Meanwhile, GM is trying to buy out union contracts and closing factories. It's burdened with heavy pension and health care costs and is paying heavily laid-off workers. It is also entangled in the demise of its spin-off and principal part supplier, Delphi Corporation, a company that GM spun off in 199 and it still responsible for health care and pension benefits for many Delphi retirees. Delphi is trying to cut union wages and looks headed fro a big strike, something that might choke of GM's parts supplies.
The buyout shows the increasing buying power of equity funds, competing in area where banks like Citigroup or lenders like General electric have been active. The pattern is delineated in a Wall Street Journal article ("Sign of the Times: A Deal for GMAC By Investor Group", 4/4/06):
In the past 24 months, such investment firms have snapped up iconic names like Toys 'R' Us, Dunkin' Donuts and Neiman Marcus; placed large bets, such as the $11 billion that fetched SunGard Data Systems; helped purchase supermarket stalwart Albertsons Inc.; and taken stakes in the infrastructure of the financial system. One of main investors in Nasdaq Stock Market Inc. is private-equity fund Silver Lake Partners.
The sale of most of profitable GMAC seems like a desperation move. As one commentator was quoted as saying in the Times article: "G.M. is having to throw furniture into the fireplace to keep the house warm."
