GM vs. Penske: The Value of Saturn

Valuation experts were left scratching their heads last week at a pair of seemingly incongruous stories involving General Motors.

On Monday, GM filed for bankruptcy, asserting that it could not possibly survive while burdened with such weak brands as Saturn. But then on Friday, automobile racing legend Roger Penske agreed to purchase the Saturn brand for Penske Automotive Group, the second largest dealership chain in the United States. Apparently, Penske was one of sixteen prospective buyers who were enamored with GM’s Saturn subsidiary.

Obviously, the Penske transaction was no bargain basement acquisition of a failed business. The Saturn dealer network is a perennial Top 10 auto brand for customer satisfaction; Penske predicted that, shed of GM’s shackles, the division could achieve profitability from “day one.”

But how can this be possible? If successful businessmen like Penske can derive value out of businesses like Saturn, why couldn’t GM do the same?

Business Graveyards

In fairness to GM, many large corporations over the years have failed to achieve long term success in nurturing independently managed subsidiaries in various industries. IBM, for instance, briefly dominated the personal computer industry from a Florida based division that was located far from the firm’s New York headquarters. Likewise, the health insurer Aetna once vowed to allow HMO market leader US Healthcare to control its own operations. And Federated Department Stores once swore that fabled retail chains like Marshall Field’s of Chicago would forever remain established as iconic standalone businesses.

Where are all of these corporate divisions today? IBM’s personal computer operations were sold to the Chinese manufacturer Lenovo. US Healthcare was long ago absorbed into the parent company operations of Aetna Inc. And, to the horror of native midwesterners, the flagship Marshall Field’s store in the inner loop of downtown Chicago was converted into a Macy’s by its parent firm!

Thus, GM is only one of many major corporations that have failed to develop and maintain  independently managed divisions within their business structures. In fact, firms that attempt to implement such strategies often end up absorbing or selling their subsidiaries.

Warning Signs

Why are the business environments of large corporations so inhospitable to independently managed divisions? Why can’t such entities co-exist, and enrich each other, in a mutually beneficial manner?

Each case is unique, of course, but certain warning signs seem to be prevalent throughout such situations. Here are a few that are worth noting:

> Identical Customer Targets. Business strategists often advise organizations to focus on familiar customer groups. Such strategies can be counterproductive, though, when divisions and their corporate parents market similar products to the same customers. Saturn automobiles, for instance, are often marketed to the same customers as GM’s Chevrolet cars. And Macy’s was already doing business in the midwestern United States at the time that its parent firm acquired Marshall Field’s of Chicago.

> Administrative Overhead Costs. Global corporations are often managed by large headquarters operations, the costs of which are allocated to (and supported financially by) the firm’s business divisions. For obvious reasons, divisions that sell large and expensive products are often better equipped to absorb significant overhead costs than those that sell small and inexpensive products. Thus, IBM learned to value expensive mainframe sales and service contracts over modestly priced retail computer sales. Likewise, GM valued transportation company truck sales over subcompact automobile dealership sales.

> Geographical Corporate Conflicts. Culture clashes between large bureaucratic parents and small subsidiaries are not only political in nature; they are often based on geographical differences as well. Saturn’s Tennessee based management team, for instance, was both physically and philosophically distant from GM’s Detroit based executive offices. Similarly, US Healthcare’s managers were based in a modern, spartan office park in suburban Blue Bell, Pennsylvania, far from Aetna’s Hartford, Connecticut headquarters, housed in the world’s largest colonial revival-style building.

These examples indicate that problems between large bureaucracies and their subsidiaries may pervade the entire spectrum of business strategy, encompassing external customer marketing activities, internal cost accounting protocols, and the manner in which managers design their working environments. This being the case, it’s no surprise that so many large organizations struggle to maintain freestanding divisions!

A Few Success Stories

Nevertheless, all is not doom and gloom. There are indeed a few examples of corporations that successfully maintain independently managed divisions.

Proctor & Gamble, for instance, is renowned for employing brand managers who continually introduce new household products throughout the global markets. Beverage firms such as Coca Cola likewise support the expansion efforts of independent brands such as Minute Maid orange juice around the world.

Interestingly, though, none of P&G’s products is actually sold under the P&G name, and thus none of their brands are burdened with the task of competing against their corporate parents for the loyalties of their consumers. And Coca Cola ensures that its subsidiary product lines are positioned as alternatives to the Real Thing, and not as replacements for it.