But now, doing comparative anatomy on these long-time rivals has gotten a lot more interesting. They’re both hot to pile up cash to buy time to turn themselves around, but they’ve taken radically different approaches to raising money from the family jewels: their finance companies. Both these babies have churned out steady profits, parental problems notwithstanding. This makes them very desirable properties.
GM is rolling the dice, big time, by selling a majority stake in GMAC to outside investors led by Cerberus Capital, named after the mythical three-headed dog that guards the gates of hell. The deal is so complicated that it makes my teeth hurt. Ford, by contrast, has stayed away from hell dogs, corporate-buyout funds and others salivating for a slice of Ford Credit. It’s going the simple and conservative route by borrowing against Ford Credit, its most desirable asset, rather than selling a piece of it. The credit company (and most of Ford’s other assets) is pledged as collateral for a whopping $15 billion in secured loans.
Why such a divergence between companies that usually track so closely? “There are more differences between the companies than there have historically been,” says David Cole, chairman of the non-profit Center for Automotive Research. “GM is well along in its turnaround,” Cole says, while “Ford still hasn’t laid out the details” of its plan.
Why should you care about any of this? Two reasons. First, we’re talking about the future of two of the biggest employers in the United States. Second, having control of GMAC change hands could affect how U.S. car buyers finance vehicles. Now that it’s not controlled by GM, GMAC will not only continue to finance GM vehicles, but plans to compete for finance business of other vehicle makers. It could be a lot of fun to watch–and it may save some car buyers money. “GMAC is now poised to move from a defensive game plan to playing offense again,” says chief executive Eric Feldstein.
The good news for GM is that it’s gotten a ton of money. It wound up with $8.7 billion from Cerberus: it got paid $10.1 billion, but had to invest $1.4 billion of that in GMAC. In addition, GM expects to collect $4 billion more over the next three years from GMAC assets that Cerberus didn’t want. The bad news: GM used to take billions in dividends from GMAC, but as part of this deal, it’s not likely to see any sizable distributions for a while.
GMAC’s biggest problem–like Ford Credit’s–is that its parent’s problems dragged its credit ratings down into junk territory. That’s a killer for a finance company, whose business is borrowing money cheap and lending it dear. If you’ve got to borrow dear, it’s hard to compete with rivals, like banks and GE Capital, that can borrow much more cheaply. The theory is that GM will be better off owning 49 percent of GMAC in its new incarnation than by owning all of the old GMAC. One reason is that GM expects GMAC’s credit rating to improve because of the sale. And indeed that’s already happened, although GMAC is still a junk-rated borrower.
In addition to giving up future dividends from GMAC, GM is giving up some control of its own destiny. GMAC will continue to finance GM vehicles–but it will make for some fascinating bargaining among GM, GMAC and Cerberus if GM tries to use ultracheap financing as a way to move vehicles again, the way it has done periodically since 9/11.
Ford Credit isn’t as attractive as GMAC, which has lucrative mortgage and insurance businesses in addition to its vehicle-finance business. But even so, Ford could have probably raised more than $6 billion had it done a GMAC-like deal. A spokesman said that even though Ford Credit’s credit rating is junk, it gets close-to-investment-grade rates by selling securities that are backed by vehicle loans that it makes.
I don’t know which of these strategies will work out better–and neither, of course, do GM or Ford or the financial markets. One thing I do know, though, is that there’s a lot riding on these deals. With luck, they’ll both work out.
