By Garsson, Robert M.
American Banker , Vol. 150
NEW YORK -- Detroit's drive to diversify in financial services accelerated Tuesday as Chrysler Financial Corp. agreed to pay $405 million for ailing BankAmerica Corp.'s Finance America subsidiary.
The price represented a premium of about 20 times earnings, which amounted to $9.9 million in the first half of the year, or $19.8 million on an annualized basis. It was more than double the finance company's book value, which Chrysler said was $189 million. FinanceAmerica has assets of $2.8 billion.
However, Chrysler Financial's chairman, Steve Miller, said the premium paid for the Allentown, Pa.-based unit was amply justified by the opportunity it gives Chrysler to expand into consumer finance.
FinanceAmerica, which consists of two units -- Finance America Corp. and BA Financial Services -- is engaged in direct consumer lending, "brand name" wholesale financing for manufacturers and distributors, and loans to small businesses.
If the deal goes through, it will be Chrysler Financial's second major acquisition of a financial services company this year, and one of a number spearheaded by the Big Three domestic auto makers and their finance subsidiaries. Earlier, Chrysler acquired E.F. Hutton Credit Corp. from E.F. Hutton Group Inc., while Ford Motor Co. bought a major savings and loan and General Motors Acceptance Corp. purchased two mortgage servicing firms.
The sale must be approved by BankAmerica's directors. Chrysler Corp.'s directors have already approved it.
For BankAmerica, whose Bank of America unit is under considerable pressure to increase capital and improve earnings, Finance America represents its second major asset sale in less than two weeks.
On Sept. 30, it sold its headquarters building for $660 million. Those funds will be booked in the third quarter, through BankAmerica has not yet said whether they will be added to earnings or the bank's loan-loss reserves.
The FinanceAmerica deal is expected to be closed by Nov. 30, which will enable BankAmerica to report the gain from the sale in 1985 income. The banking concern did not say how the funds will be applied.
Chrysler Financial's Mr. Miller conceded that the final price came in on the high side that the bidding and narrowed to "half a dozen finalists with varying degrees of interest [and] that's why the price is high.
"We felt it was worth it, though," he added.
Mr. Miller said Chrysler can fund FinanceAmerica's assets at a lower rate than BankAmerica, so that a refinancing will give the company an immediate boost in earnings, a view that was supported by BankAmerica officers.
Moreover, he said, "we plan to cut it loose to grow so that the premium won't sound quite so high."
But a prime concern of expansion-minded Chrysler Financial was to acquire a going consumer finance company. Earlier this year, it acquired E.F. Hutton Credit Corp., an equipment leasing concern.
"It was really the only one available," he said. "The only two independents are Household Finance and Beneficial. The est are all subsidiaries of companies like Control Data, Westinghouse, or Borg Warner."
Ronald I. Mandle, a bank stock analyst at Paine Webber Inc., described the price as "high, per se, given its earnings, but not high considering what it could earn."
FinanceAmerica's first-half earnings gave it a return on equity of about 10.5%, or $10.50 on each $100 of equity. By contrast, General Electric Credit Corp., among the most respected of the nation's finance companies, earned 19.8% on total equity in 1984.
Stephen T. McLin, BankAmerica's senior vice president for corporate planning, said one reason Finance-America's returns were below those common in the industry is its funding structure.
But he also described the company as a turnaroud situation whose potential earnings are well above those recorded in past years. …