IMD-1-0268 © 2007
Bris, Arturo; Francis, Inna
Hedge fund Cerberus Capital Management assembled a deal to purchase a majority stake in GMAC - the funding business of auto maker GM. The sale of a majority stake in GMAC's lending arm was part of a strategy to return GMAC's credit rating to investment grade; which would lower its cost of borrowing - crucial for a finance company to remain competitive. The deal would likewise provide parent GM; which was struggling under the weight of ferocious competitive pressures and a gigantic fixed cost structure with a cash infusion.
Learning objectives: Address the issue of whether GMAC and Cerberus can structure a deal that would give the yield they needed to a private equity firm and give GMAC investment-grade rating. Private equity and hedge fund investors generally buy businesses as a way to pile on debt; but GMAC could not garner investment-grade ratings with a high leverage ratio. Another complication to be considered was the auto finance business; which made up a little less than half of GMAC's sales. Participants may question whether the private equity firm should get involved in GM automobiles that are funding the business is bordering the threat of bankruptcy protection along with when the auto maker's market share is falling.
Subjects: Private equity; Acquisition; GM; Turn around strategy; Capital structure
Settings: USA; Hedge fund; Private equity; US$ 18 billion of assets under management; May 2005 - December 2006
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