Chrysler Will Acquire Consumer Credit Unit From BankAmerica
The auto industry’s drive to diversify into non-automotive fields before the next slump hits the car market continued Tuesday when Chrysler announced that it had agreed to pay $405 million for FinanceAmerica, the consumer credit subsidiary of BankAmerica.
The purchase of FinanceAmerica, which will be merged with the auto maker’s financial-services arm to form the nation’s fourth-largest non-bank finance company, continues the planned shrinkage of loss-plagued BankAmerica and is the latest in a series of huge acquisitions by Detroit auto makers over the past year.
Flush with cash from record profits, the Big Three car companies have been aggressively shopping for businesses that can lessen their dependence on the volatile auto business. In addition to financial-services companies such as FinanceAmerica, Detroit has scooped up such diverse businesses as small high-tech firms, big defense operations, a mortgage banking concern and a major San Francisco-based savings and loan.
GM-Hughes Deal
So far, the biggest acquisition by an auto company has been General Motor’s $5.2-billion purchase earlier this year of Hughes Aircraft. Next largest was GM’s earlier $2.55-billion purchase of Electronic Data Systems, a Dallas-based computer-services company.
“When you are generating the kinds of profits and cash flow they are, you can’t reinvest it in cars that quickly, so the auto companies have excess cash to invest right now,” said Fred Steingraber, chairman of A. T. Kearney, a management consulting firm with a number of automotive clients.
Because the auto market has become so fiercely competitive, he added, “more and more auto companies are reluctant to put their money solely into brick and mortar to build new plants, so they are looking at other business options with regard to the future, and they are taking different channels.”
Still, analysts say the auto makers will have to make even more non-automotive acquisitions to significantly reduce their dependence on the North American car market.
Pool of Cash, Securities
“We’re still pretty well tied to the auto cycle” even with the latest acquisition, said Chrysler’s Robert S. Miller Jr., the firm’s top finance executive and chairman of Chrysler Financial, its financial-services unit.
Chrysler’s acquisition of FinanceAmerica will be financed from the company’s pool of cash and marketable securities, which totaled nearly $3.8 billion at the end of June, and is part of the auto maker’s strategy to move aggressively into the high-tech and financial-services industries, company officials said.
It comes on the heels of Chrysler’s September purchase of Gulfstream Aerospace, a commercial jet manufacturer, and follows the firm’s acquisition in July of E. F. Hutton Credit, a commercial finance company that also is being merged with Chrysler Financial.
Among other recent strategic moves, Chrysler has formed a financial-services joint venture with General Electric Credit and this week announced plans to set up a joint venture to build small cars in the United States with its Japanese affiliate, Mitsubishi. Meanwhile, it has increased its stake in Mitsubishi to 20% and has acquired a 5% interest in Maserati, the Italian sports car company.
Miller said in an interview Tuesday that the FinanceAmerica deal, which will be closed by Nov. 30, is designed to expand the base of Chrysler’s financial subsidiary, lessening its dependence on financing the sales of Chrysler cars and trucks. Traditionally, Chrysler Financial has suffered along with the parent company whenever domestic car sales have declined, but Miller said that the E. F. Hutton and FinanceAmerica acquisitions should give the subsidiary better “balance.”
David Healy, automotive analyst with Drexel Burnham Lambert, added that Chrysler’s goal is to develop Chrysler Financial’s non-automotive lending business to the point where it accounts for roughly half of the subsidiary’s business within three or four years.
“We aren’t walking away from cars and trucks, and we haven’t lost heart in that core business, but we think we can bring more balance to our financial operations,” Miller noted. “In fact, diversification will make it possible for us to better provide financing for cars and trucks during downturns in the car market,” since Chrysler’s financial operations will no longer live and die with the parent firm’s fortunes, he added.
Miller also insisted that Chrysler’s recent string of acquisitions won’t force the company to cut back on investments in new products in its basic car and truck operations. Analysts agreed.
Liz Mulhare, a credit analyst who specializes in the auto industry for Standard & Poor’s in New York, said Chrysler has more than enough cash and borrowing power to finance its diversification strategy and maintain its $11.5-billion, five-year product program.
“This acquisition fits within a framework of diversification that they want to accomplish, and they have the funding to afford it,” she said.
Analysts consider Allentown, Pa.-based FinanceAmerica, with current assets of $2.8 billion but earnings of only $15.8 million last year, only marginally profitable considering its large size. But Healy said Chrysler officials believe that its earnings potential was depressed by BankAmerica’s loan-loss problems and said that Chrysler expects to significantly expand FinanceAmerica, which already has operations in 42 states, within the next year. Still, Healy believes that the relatively high price tag of more than 25 times 1984 earnings makes it “an expensive effort to diversify (Chrysler’s) earnings away from the automotive business.”
Improved Profitability
For BankAmerica, the sale of FinanceAmerica reflects a drive to reduce its geographic scope and improve profitability. The San Francisco-based bank holding company, parent of Bank of America, lost $338 million in the second quarter, the second-largest quarterly loss in U.S. banking history.
The $405-million sale is expected to bring BankAmerica more than $100 million after taxes. “The sale will increase our flexibility, enabling us to strengthen existing business activities and take advantage of new opportunities,” Samuel H. Armacost, president and chief executive, said.
BankAmerica officials would not be more specific about how the company will use the proceeds.
Acting to bolster its cash reserves, BankAmerica last month agreed to sell its San Francisco headquarters for $660 million and has said it is seeking a buyer for its Los Angeles building.
James Risen reported from Detroit and John Broder from Los Angeles. HOW THE BIG THREE AUTO MAKERS ARE DIVERSIFYING
General Motors 1984 -- Purchases equity positions ranging from 10% to 30% in six high-technology companies involved in machine vision systems and artificial intelligence research.
October, 1984 -- Buys Electronic Data Systems, a Dallas-based computer-services company, for $2.55 billion.
May, 1985 -- Acquires Colonial Mortgage, Philadelphia, for $190 million.
June, 1985 -- Announces $5-billion acquisition of Hughes Aircraft, El Segundo-based aerospace and defense giant. The deal is pending.
June, 1985 -- Buys warrants for 10% of Etak, a Sunnyvale, Calif., electronics company, for undisclosed terms.
July, 1985 -- Purchases the mortgage-servicing business of Norwest Mortgage Inc. of Waterloo, Iowa, for $125 million.
Ford July, 1983 -- Buys assets of Parker Chemical of Madison Heights, Mich., a manufacturer of chemical specialties. Terms aren’t disclosed
August, 1983 -- Pays about $6 million for 16% of Synthetic Vision Systems Inc. of Ann Arbor, Mich.
May, 1984 -- Acquires 73% stake in San Diego-based Starnet Corp. for undisclosed terms. The company provides long-distance telephone service.
May, 1985 -- Acquires minority interest in Pittsburgh-based American Robot Corp., which makes computer-integrated manufacturing systems. Terms aren’t disclosed.
August, 1985 -- Buys First Nationwide Financial, a San Francisco-based savings and loan association, for $493 million.
Chrysler August, 1985 -- Buys E. F. Hutton Credit Corp., a commercial finance company based in Greenwich, Conn., for $125 million.
September, 1985 -- Acquires Savannah, Ga.-based Gulfstream Aerospace, a jet aircraft manufacturer, for $637 million in cash and notes.
Oct. 8, 1985 -- Announces purchase of FinanceAmerica Corp. of Allentown, Pa., from BankAmerica for $405 million. THE LARGEST U.S. FINANCE COMPANIES
Ranked by Assets Billions as of Dec. 31, 1984 of dollars 1. General Motors Acceptance 54.43 2. Ford Motor Credit 24.03 3. General Electric Credit 18.47 4. Sears, Roebuck 9.78 5. Beneficial 7.72 6. Commercial Credit 7.37 7. CIT Financial 7.15 8. Chrysler Financial 7.15 9. Associates of North America 6.64 10. Household Finance 6.57 20. Finance America 2.96
Source: American Banker
