IMD-1-0267 © 2007
Bris, Arturo; Francis, Inna
Hedge fund Cerberus Capital Management gathered 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 financing arm was part of a strategy to return GMAC's credit rating to investment level; which would lower its cost of borrowing - essential for a finance company to remain competitive. The sale would also provide parent GM; which was fighting under the weight of a huge fixed cost construction and fierce competitive pressures with a cash infusion.
Learning objectives: Address the question of whether GMAC and Cerberus can structure a deal that would give a private equity firm the return they needed and give GMAC investment-grade rating. In order to pile on debt private equity and hedge fund investors usually purchase businesses; but GMAC couldn't garner investment-grade ratings with a high leverage ratio. Another complication to be considered was the auto finance company; which made up a little less than half of GMAC's earnings. Participants may question whether the private equity firm should get involved in GM autos that are financing when the auto maker's market share is slipping as well as the business is bordering the danger of bankruptcy protection.
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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