Why Would General Motors Consider Listing Shares of Its Self-Driving Unit?

Shares of General Motors (NYSE:GM) showed a little life last Friday after news that the automaker was discussing options regarding its self-driving business Cruise Automation. Let’s dig into the details and better understand how and why GM might go down this road.

Unique relationship

From the get-go, General Motors’ $1 billion deal for Cruise Automation was unique. It was unique in the sense that it avoided fully integrating the company and rather opted to let Cruise Automation continue running as a start-up responsible for its own business. While most acquisitions are fully integrated, this was a brilliant move by a legacy Detroit automaker knowing it needed roots in Silicon Valley but also had to let the company blossom on its own.

GM's Cruise AV with driverless vehicle technology and sensors mounted on roof.

Image source: General Motors.

Friday’s rumor that GM is reviewing options for listing Cruise Automation is confirmation that its acquisition has done incredibly well. So well, in fact, that last month SoftBank agreed to invest $2.25 billion in GM Cruise, a 19.6% stake in the subsidiary, valuing the unit at $11.5 billion. That’s quite an increase in valuation in only a short time from GM’s 2016 acquisition.

What are common options?

One option for GM would be to spin-off the company. Typically, the parent company does this because the value of one part of the company would be worth more separated rather than remaining with the whole. In this case, that’s likely true as Cruise Automation shares would probably trade at a much higher price multiple than the core, capital-intensive GM, which currently has a forward price-to-earnings ratio of less than 7, per Morningstar consensus estimates. We saw a similar move when Fiat Chrysler Automobiles spun-off Ferrari. Ferrari now trades at a price-to-earnings ratio of 42 while the remaining FCA core business trades at 7.5 times earnings.

But, in my opinion, GM would be insane to spin-off Cruise Automation. That would mean getting rid of what should develop into a massive asset for profits. And it would reverse all the progress it’s done to build a tech story with Wall Street, as it’s tried desperately in recent years to convince investors it’s more than just a vehicle manufacturer.

It’s more likely that GM is considering, at least in the short term, offering a small percentage of its self-driving unit with the intention to hold enough remaining equity to keep control, giving the self-driving unit a greater ability to attract key tech talent by dangling a potential IPO — investors often overlook how in demand driverless vehicle tech talent is. If GM is to compete in the world of driverless vehicles, it has to compete with tech giants like Waymo, the self-driving subsidiary of Google-parent Alphabet, for talent.

What to expect?

Don’t expect anything from GM, at least not yet. GM will most likely decide what to do with Cruise Automation when the business is much more developed, especially considering that GM Cruise is ramping up to unveil an app-based ride-hailing service in 2019. If that service ends up being highly successful, the value of its self-driving business could soar.What we know for sure is that SoftBank’s investment in Cruise, and the discussion GM is having about potential options for Cruise Automation, means it has taken a huge step in driverless tech credibility and a step toward convincing Wall Street it’s no longer only a vehicle manufacturer.

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