GMAC: Is Half A Loaf Better Than The Whole?

Abstract

In November 2006 General Motors sold 51% ownership of its subsidiary, the General Motors Acceptance Corporation to Cerebus Capital Management in a complicated transaction. This paper demonstrates that GMAC produced over 90% of consolidated General Motors profit over the past two decades and tries to determine why the GM team sought to sell its best player and answer the natural follow-up question: why sell 51% of GMAC, instead of all of it? A number of possible explanations are considered, including cleaning up GM’s balance sheet, unlocking the submerged market value of GMAC, and improving GMAC’s credit rating/ access to capital. The paper concludes that the partial divestiture was a sound move that could easily have resulted in better financial performance for GM than the status quo, but that the entire strategy was upset by the subprime loan crisis of 2007-08.