In the 1990s, companies rushed to increase revenues by building up their finance businesses. Now, many are racing to get rid of them. In the biggest such deal to date, Sears Roebuck (S) sold its credit-card operations to Citigroup (C) for $3.4 billion on July 15. Now, Circuit City Stores (CC) is considering selling its $3 billion portfolio of bank and credit-card receivables. And General Motors Acceptance Corp. (GM) wants to raise as much as $1.5 billion by shedding its commercial-mortgage business (see BW, 8/04/03, "For GM, Mortgages Are Now the Motor").
The trend suggests that, after three years of economic doldrums and a listless stock market, Corporate America is getting back to basics in a big way. Says Carter McClelland, president of Banc of America Securities: "Companies are focusing on how to improve returns by getting rid of things that aren't core businesses." Adds John A. Mahoney, a managing director in the financial institutions group at Goldman Sachs: "You'll continue to see companies selling their finance businesses."
CRITICAL MASS. Buyers, too, are plentiful. Financial companies are lining up, eager to expand their mainstay businesses. Juggernauts such as Citigroup and General Electric's (GE) mammoth financial operations, with strong credit ratings and massive balance sheets, are betting that they have the financial muscle to turn such businesses into big earners after the economy picks up.
"A large number of banks have gone through a business-line review, and their thought is that if they don't have the critical mass in a particular business, either they'll go out and buy something, or sell it," says Vikram Gandhi, co-head of the global bank group at Morgan Stanley. "Banks are very focused on getting the right returns on the businesses they're in."
The scale of these deals is impressive. Companies ranging from energy provider Aquila (ILA) to communications-services provider Alltel (AT) have sold $7 billion worth of financing businesses this year. That's the most since such sales peaked at $8.4 billion in 1998, according to Thomson Financial. "This is one of the few areas of mergers and acquisitions that hasn't retreated but instead has grown," says Richard J. Peterson, chief market strategist at Thomson.
NO MORE DEADBEATS. By yearend, total sell-offs should reach $10 billion, twice as much as in 2000, Thomson estimates. At the moment, the hottest commodities are credit-card businesses. Potential buyers are eyeing retailer operations such as Circuit City, Target (TGT), and Kohl's (KSS). They hope these retailers will follow the example of other chains, such as Best Buy (BBY) and Home Depot (HD), and let financial companies run their card businesses for them. Says Moshe Orenbuch, a specialty finance analyst at Credit Suisse First Boston: "Credit cards are going to be an exciting area of activity."
Such deals are attractive to banks and card companies, which can garner big economies of scale by bulking up their own operations. The come-on to retailers? They get deadbeats off their books and eliminate potential drags on their valuations. For example, Sears shares soared 14%, to $40, in the five trading days after it announced the sale of its card portfolio. While Target and Kohl's insist they're not interested in selling, analysts bet some of the dozen big retail holdouts will eventually say yes.
Companies are dumping everything from leasing to lending to investment businesses. Montreal-based manufacturer Bombardier (BDRAF) is selling roughly half of its financing businesses that used to fund everything from business-jet purchases to houses and freight cars. "We're going to concentrate on manufacturing and only crucial financing," says Dominique Dionne, vice-president for communications at Bombardier.
ON THE HUNT. Not everyone is caught up in the fever. A few companies have built up such a strong presence in financial services that they have no intention of leaving the business. Case in point: General Electric. Like the banks, GE is looking to acquisitions to expand its financing business. "We're well-established in consumer finance outside the U.S., and we're looking to bring our experience here," says GE spokesman David Frail. "This is one of the GE businesses that [Chairman and Chief Executive] Jeff [Immelt] has targeted for growth."
Still, with the economy remaining so muddled, other companies are coming to the conclusion that financing isn't for the fainthearted -- or for them, for that matter. Any takers for a financial business? The line starts here. By Emily Thornton, with Diane Brady, in New York