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Case
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Reference no. IMD-1-0268
Published by: Institute for Management Development (IMD)
Originally published in: 2007
Version: 22.01.2008
Length: 9 pages
Data source: Published sources

Abstract

Hedge fund Cerberus Capital Management assembled a deal to buy a majority stake in GMAC - the financing 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 grade, which would lower its cost of borrowing - essential for a finance company to remain competitive. The sale would also provide a cash infusion to parent GM, which was struggling under the weight of a massive fixed cost structure and fierce competitive pressures. Learning objectives: address the question of whether Cerberus and GMAC can structure a deal that would give a private equity firm the return they needed and give GMAC investment-grade rating. Private equity and hedge fund investors usually buy companies in order 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 revenue. Participants may question whether the private equity firm should get involved in financing GM cars when the auto maker''s market share is sliding and the company is bordering on the threat of bankruptcy protection.
Location:
Size:
USD18 billion of assets under management
Other setting(s):
May 2005 to December 2006

About

Abstract

Hedge fund Cerberus Capital Management assembled a deal to buy a majority stake in GMAC - the financing 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 grade, which would lower its cost of borrowing - essential for a finance company to remain competitive. The sale would also provide a cash infusion to parent GM, which was struggling under the weight of a massive fixed cost structure and fierce competitive pressures. Learning objectives: address the question of whether Cerberus and GMAC can structure a deal that would give a private equity firm the return they needed and give GMAC investment-grade rating. Private equity and hedge fund investors usually buy companies in order 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 revenue. Participants may question whether the private equity firm should get involved in financing GM cars when the auto maker''s market share is sliding and the company is bordering on the threat of bankruptcy protection.

Settings

Location:
Size:
USD18 billion of assets under management
Other setting(s):
May 2005 to December 2006

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