Corporate strategies?

April 11, 2008 1:54 PM

Why do so many large conglomerates have a financial services branch? Like GE Financial, Siemens etc.
posted by Student of Man to grab bag (8 comments total)

When you make tons of money, what do you do with it to make more money? Well, lend it out, for one.
posted by Dee Xtrovert at 2:03 PM on April 11, 2008

Lend it to people so they can buy your products on time. Make even more for the same products.
posted by sagwalla at 2:05 PM on April 11, 2008

Also, you are in a good position to judge the risk on these loans. Your average bank isn't going to know much about, say, railroad locomotives, but the guys at GE sure will.
posted by gyusan at 2:07 PM on April 11, 2008 [1 favorite]

Because they're profitable.
posted by Dec One at 2:11 PM on April 11, 2008

These financial arms may have started out as a use of excess capital and/or a vehicle for funding the customers of the industrial segments, but that's not the case anymore. GE Capital, Textron Financial (subsidiary of Textron, which makes Bell helicopters and Cessna airplanes) and GMAC have all expanded into large diversified financial companies who access the capital markets for funding.

The primary driver of this growth was the advantage these large conglomerates had in securing attractive financing via the capital markets. For example, GE Capital benefits from the GE's AAA-rating and can fund via the commercial paper or unsecured investment grade markets. Independent finance companies have trouble getting investment grade ratings and often need to rely on the asset-based financing market, which has been particularly difficult of late and has always been more expensive.

But this strategy can backfire if the corporate parent loses its investment grade rating. This is what led GM to partially divest GMAC. GMAC's relationship to GM had turned into a negative factor in the opinion of the rating agencies and fixed income investors. Of course, GMAC has subsequently fallen flat on its face for reasons that have nothing to with GM.
posted by mullacc at 2:24 PM on April 11, 2008 [2 favorites]

Because only large conglomerates can generally afford the staff, knowledge and liquidity to be able to help finance their own products. Financial risk modeling can be incredibly complex and specialized. Financial services are in a good position to not only lend out the loans, but be able to (theoretically at least) hedge against credit and interest rate risks associated with such loans. Sure you could go to your bank to get a loan, but the large conglomerates will, in most cases, be able to give you a better deal.

What does a better deal mean? It depends, but if you need $300,000 in generators for a project that means that GE can not only supply you with the generators, but be able to make money off financing fees? Well that's not only icing on the cake, but sometimes greater than the cake itself. Places like GE can also create structured financing and all kinds of deals that the company they are dealing with will find more attractive. Sort of like companies offering creative loans for home buyers so they can afford a house, except in this case they are often building the house too.

A lot of companies provide financing for a lot of reasons, but it usually boils down to the fact they can afford to and have the expertise to do so an effective manner. I've dealt with companies who have turned down the opportunity to have a financial services division, simply because it is not business policy to "become a bank." They're not entirely stupid for turning down big fees. There's a lot of liabilities that come with doing something like that, often times a lot of off-balance sheet liabilities. Private companies whose owners are conservative and have a lot of their net worth tied up in the company usually don't chose to go this route. Who wants to see some trader or managing director bring in several hundred million of off-balance sheet liabilities on a CDS that went the wrong direction? Due to their ownership structure, large public companies are usually not risk-averse to such things like this.
posted by geoff. at 2:28 PM on April 11, 2008

As far as the fact that they are organized as separate companies rather than just as arms of the parent company itself, I don't have any details, but I've always understood that there were various laws and regulations that were much easier to follow if all you did was finance. There also may be a separation of assets piece to it as well.
posted by cschneid at 5:33 PM on April 11, 2008

Just a brief gift of numbers from my time at GE. The financial arm supplied 40% of the company profit and was less than 10% of the operating cost. Insurance and finance can generally be very profitable if run right.
posted by ptm at 6:55 AM on April 12, 2008