Last week, reports that American automaker General Motors (GM) made an offer to buy ride-sharing company Lyft and was rebuffed sparked questions about GM’s future plans.
GM stock has been on a roller-coaster ride over the past year as the company struggled to come out from under its ignition switch crisis and convince investors that it had future growth potential. In January General Motors invested $500 million in Lyft, a move that many took as a good sign that the car manufacturer will remain relevant as the auto-industry evolves.
However, GM may need to acquire the Uber rival outright in order to protect that relationship.
At the moment, General Motors is enjoying a 9% stake in Lyft and the two have a mutually beneficial relationship. They have partnered on “Express Drive,” a service that allows people to become Lyft drivers by renting GM cars for a lower rate, and GM is planning to test out self-driving taxies together with Lyft in the coming months.
Why Should GM Buy Lyft?
While there seems to be no need for GM stock to spend the extra cash to acquire Lyft, the partnership between the two is a valuable asset that is likely to help General Motors unlock new growth opportunities as ride-sharing becomes more and more popular.
Protecting that partnership is one of the key reasons General Motors should be doing everything it can to court Lyft.
When GM reportedly offered to buy Lyft, the ride-sharing service was already shopping around for other offers. In the end, Lyft opted to undergo another round of fundraising, but if the company is acquired by anyone other than GM, the partnership between the two firms is likely to dissolve. That would be a huge loss for GM stock, as most see the Lyft initiatives as a big part of General Motors’ future growth strategy.
What Would It Cost GM Stock?
Lyft has been valued at $5.5 billion, a hefty price tag for a company like General Motors. At the end of the second quarter, GM had nearly $19 billion of excess cash, but the firm needs to hold on to the majority of those dollars in order to fund R&D and keep itself afloat in the case of another recession.
However, GM could offer some combination of cash and stock in order to acquire Lyft, which wouldn’t make a massive dent in the automaker’s cash reserves.
Lyft is certainly a hot acquisition target, especially for automakers. The tech space has seen a great deal of M&A activity this year, and it isn’t likely to end anytime soon. Low interest rates and favorable borrowing conditions have made acquiring firms like Lyft, whose failure to meet the market’s expectations has weighed on its price tag, very attractive.
General Motors may not want to wait for a bidding war to break out though, as it might lose one of its most valuable relationships to a rival firm.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities
