Wells Fargo to Buy GMAC Unit – Analyst Blog

On Wednesday, Wells Fargo & Co. (WFC) announced its intention to buy the North American factoring business of a unit of GMAC Inc. (GJM), the U.S. auto finance company, for undisclosed value and terms. However, the deal is expected to be completed by April 30, 2010.

 

GMAC’s factoring business is operated by purchasing and collecting accounts receivable or by advancing cash loans worth less than the full value of the receivables, thereby earning on the margin when the funds are repaid by the customer. Wells Fargo will also acquire the client service application system currently used to manage these credit relationships.

 

With approximately $4 billion in annual factored receivables volume and about 150 small and mid-sized clients, GMAC’s factoring portfolio is presently operated by the commercial services division of GMAC Commercial Finance Group. Post acquisition, this factoring business and the portfolio and client service application system will be merged with the Trade Capital wing of Wells Fargo Trade Capital.

 

The move to acquire GMAC’s factoring operations appears to be a good opportunity for Wells Fargo as working with these types of financing portfolio keeps the funds moving, thereby creating liquidity, especially in the current economic scenario where the supply of bank credit remains undersized. Additionally, inclusion of GMAC’s clients will enhance Wells Fargo’s clientele, which can eventually capitalize on other products and services of the leading bank. This will not only provide earnings accretion but will also add extensive economies of scale to Wells Fargo operations.

 

On the other hand, GMAC’s decision to vend its business came in due to the weak financial health of the company. GMAC continues to dispose of several of its business operations to primarily focus on its core automotive lending business. The huge losses incurred by its troubled residential mortgage unit, Residential Capital, impelled GMAC to obtain multiple loans totaling $17 billion under the Troubled Asset Relief Program (TARP) from the government in 2009. Hence, the majority U.S. government owned GMAC is opting for divesting most of its divisions in order to repay the TARP loan and rightsize its business for revival.

 

On Wednesday, the shares of Wells Fargo closed at $30.86, down 0.7%, on the New York Stock Exchange.