Why Ally Financial and GM, Once Family, Are Now Rivals

Michael A. Carpenter has spent a lot of time chatting up car dealers lately. In mid-February, the Ally Financial chief executive officer met with dealers in Dallas and Houston to tell them that the former General Motors (GM) subsidiary, once called GMAC, will be able to take care of their funding needs for years. Ally, which is eyeing a second-quarter initial public offering, has a strong balance sheet, he said. And as a deposit-taking bank, it can raise funds more cheaply than nonbank rivals. He made a similar pitch at a dealer convention in San Francisco the week before. "They're trying to get the dealers on their side," says Tom Durant, owner of Classic Chevrolet in Grapevine, Tex., who was at the Dallas meeting.

Courting dealers is a wise move, given what GM is up to these days. The resurgent automaker has been expanding its own lending operations, offering leases and subprime loans to help sell more cars. Ally makes auto loans to consumers and helps dealers finance their inventories. GM's dealers, as a group, are its largest customer. So the automaker's heightened interest in lending could complicate Ally's IPO plans.

Other banks are also getting more aggressive in auto finance. According to Experian Automotive, banks' share of auto finance increased to 36.6 percent in the fourth quarter of 2010, from 32.8 percent a year earlier. The relationship with GM "is an important and mutually beneficial strategic alliance," says Ally spokeswoman Gina Proia.

In 2006, GM spun off 51 percent of its financing unit, General Motors Acceptance Corp. GMAC changed its name to Ally last year. The U.S. Treasury owns 73.8 percent of Ally as a result of its $17.2 billion bailout of the lender. GM, which is 33 percent owned by the Treasury, still owns 10 percent of Ally.

Carpenter will have to explain to potential investors how Ally will retain its GM business even as the carmaker is looking at other options. "The No. 1 question Ally will have to answer ... is how they can go public if their No. 1 customer is moving away from them," says Maryann Keller, who runs consulting firm Maryann Keller & Associates in Stamford, Conn. "They're going to have to tell a story about what their business model is going to be."

It's no secret that GM executives want to give customers more borrowing options as a way to spur sales. Since emerging from bankruptcy in July 2009, GM has trailed rivals—most of whom own an in-house lender—in selling cars to consumers with subprime credit and in leasing. That's why GM bought Fort Worth subprime lender AmeriCredit in July and renamed it GM Financial. The unit more than doubled loan origination in the fourth quarter, to $935 million. "We're beginning to close this [gap] because we have competition between GM Financial and Ally," GM North American President Mark L. Reuss said at a January investor conference, noting that the presence of GM Financial was spurring Ally to make more subprime loans.

GM doesn't want to drive Ally out of the business. Its dealers rely on Ally to lend to their customers. More important, Ally provided 82.1 percent of the money GM dealers used to stock showrooms in the fourth quarter—so-called floor-plan loans. Currently, Ally offers dealers rates as low as 2.25 percent on such loans, says Durant, the dealer in Grapevine. With a junk credit rating and no access to bank deposits, GM would have a hard time offering such low rates, Keller says.

At the same time, GM is starting to boost its leasing and subprime lending. GM Financial started a trial leasing program in Ohio in December and expanded it to seven Northeastern states in January, GM Vice-President of U.S. Sales Don Johnson said on Feb. 1.

As the two companies become more competitive in retail lending, GM has pondered a foray into floor-plan financing, says Duane R. Paddock, owner of Paddock Chevrolet in Kenmore, N.Y., and co-chairman of GM's National Dealer Council. GM has told its dealers that in the long run it may be able to finance inventory. "We have assumed that GM Financial would become a floor-plan source," says Paddock. Although "it's not going to happen anytime soon."

GM executives worry that if credit markets freeze again, their dealers could have a hard time getting financing. "If there's a disruption in the wholesale finance business, that creates a lot of risk for the company," GM Vice-Chairman Stephen J. Girsky told analysts in February. The automaker made overtures to buy a piece or all of Ally but was rebuffed last year, say two people familiar with the matter. Since industrial companies cannot own a bank holding company, if GM were to buy Ally it would have to sell Ally's bank and mortgage business.

As GM moves in, Ally is diversifying. The company, which already does a lot of business with Chrysler dealers and tiny Saab, wants to work with other brands as well. And Carpenter's campaign is getting some traction with dealers. "When the going got tough, a lot of banks got out of floor-plan lending," says Fort Worth dealer James Hardick, an owner of Moritz Chevrolet and Moritz Chrysler Jeep Dodge. "The only financing available was GMAC. A lot of dealers will be loyal to them."

The bottom line: Moving toward an IPO, Ally is shoring up its relations with dealers and drumming up new business as GM expands its financing efforts.

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