It's widely assumed that selling 51 percent of its captive finance company could raise as much as $15 billion for General Motors. The book value of General Motors Acceptance Corp. is about $23 billion, but the income stream has been strong, which is likely to boost the price.
To Wall Street, that's a lot of potential value that could be unlocked for shareholders such as Kirk Kerkorian, who owns about 10 percent of GM.
Though Kerkorian and other investors might be looking for a payday, it would be nice if some of the receipts were plowed back into the business as working capital to prop up the automotive operations. You know, feed the undernourished goose that used to lay the golden eggs.
But when GM CEO Rick Wagoner confirmed that the automaker may sell a controlling interest in GMAC, one important factor was generally overlooked: GMAC may not be central to the vehicle-making business, but it is essential to the vehicle-selling business.
GMAC isn't just a cash cow. Sure, the profits that flow from the finance company to GM's bottom line are important -- $2.2 billion so far this year. But the real value to the automaker is the support GMAC gives to dealers who sell the company's cars and trucks.
That's why GMAC was founded in 1919. That's why Ford Motor Co. and every other automaker subsequently started their own captive finance companies or created a virtual captive through a relationship with a bank.
Last year, GMAC provided retail financing for 49 percent of the vehicles sold or leased by its dealers in North America.
The percentage fluctuates because dealers can shop the retail paper around.
In years when GM uses a lot of retail incentives -- or when high interest rates choke off bank loans -- GMAC's share of the business goes up.
Dealers know that when times get tough, GMAC won't waver, because it can't.
For example, in late 2001 GM used its "Keep America Rolling'' incentive program to revive light-vehicle sales after the U.S. economy threatened to implode in the wake of the Sept. 11 terrorist attacks.
That program and similar ones continued into 2002, when 84 percent of GMAC's retail contract and lease volume in the United States included some type of rate or residual value incentive.
A year later, 78 percent of the retail contracts and leases bought by GMAC included an incentive. Last year, the rate dropped to 63 percent, but this year's Employee Discount for Everyone program will drive the rate back up for 2005.
GMAC also provided wholesale financing -- floorplanning -- for 81 percent of the cars and trucks the factory sold to GM dealers in North America last year. Overseas, it was 86 percent.
That's why GM will make sure that if it sells a controlling interest in GMAC, it will be to a rock-solid company.
And you can bet the deal will have terms that protect the finance company's strategic support for vehicle sales.
You may e-mail Edward Lapham at