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Is the Conglomerate Changing Channels or Tuning into Regularly Scheduled Programs?
Many have been speculating that conglomerate General Electric (GE) is taking measures to return to its industrial roots. Last year, the company considered divesting or spinning off its Louisville-based Appliance segment (and is still discussing whether or not to shed its consumer industrial segment). Due to the difficult economic backdrop, the company decided that it was not an opportune time to clear out its kitchen clutter just yet. Still, management’s more recent decisions have continued to spur the debate regarding what direction the conglomerate is taking to ensure satisfactory long-term growth.
For example, the diversified company has been trimming its financial arm, GE Capital. Its financial unit had been hard hit by turmoil in the domestic credit markets and recessionary pressures over the past few quarters. In addition, this business segment may soon be subject to new Federal legislation on financial companies. There is speculation that the conglomerate will divest its financial subsidiary to avoid the impending regulation. For now, its financial arm is well capitalized, thanks to the free cash flow generated by GE’s industrial units. Nonetheless, we think that in the coming months management will concentrate on streamlining GE Capital and shedding certain peripheral components from this subsidiary.
In a more definitive example, in early December, GE signed an agreement with cable company Comcast (CMCSK) to create a leading entertainment company. General Electric plans to buy French media company Vivendi’s 20% stake in GE’s media branch, and then combine its broadcasting and entertainment assets with those owned by Comcast. After the deal is complete, Comcast will own 51% and manage the joint venture that will include all NBC Universal businesses, including its cable networks, filmed entertainment, television properties, theme parks, and unconsolidated investments. The merger, however, will be subject to regulatory and anti-competitive approval.
GE has a long history with show business. The light bulb maker founded the Radio Corporation of America (RCA) in 1919, to further the growth of radio broadcasting. RCA soon grew into a corporate giant of its own measure. But, in 1930 anti-trust legislation caused GE and joint venture partner Westinghouse to relinquish their ownership rights.
In 1986, the electrical equipment company reunited with its former subsidiary’s core broadcasting assets (NBC) during a mergers and acquisitions boom. Former CEO, Jack Welch spent part of his tenure streamlining the business. Also under his leadership, GE diversified its corporate portfolio to expand its footprint. Building the company’s media branch and financial arm helped the conglomerate turn in a new direction. Such moves were sought to help shelter the conglomerate from cyclical downturns in its industrial segments. After the company added RCA’s television broadcasting assets, it continued to supplement its media business through acquisitions. The success of “Must See” TV and complementary media assets included in GE’s entertainment unit in the following two decades helped bolster the company’s overall performance. Nevertheless, over the past couple of years, the varied mix began to weigh on margins and slow total growth.
The company has been colloquially nicknamed “General Eclectic.” Like many other conglomerates, GE will purchase assets and then incorporate complementary or supplementary elements into its business. Overall, the diversified portfolio has served it well over the years. Of course, there have been times when GE did not benefit from the sum of its parts. For example, when management did not achieve the synergies it aimed for from the acquisitions, or when a specific subsidiary was too draining on the whole (perhaps too capital- or labor-intensive). In such cases, the company has historically decided to shed these non-essential components.
Going forward, we think that GE will work to simplify its portfolio and to better define its business and the roles of its various subsidiaries. We believe that the conglomerate will focus on organic growth in the coming years, rather than rely on accretive purchases to expand its organization. To this end, management may try to build its infrastructure segment and reposition its industrial units in the near term. Although the diversified nature of its businesses should continue to support overall growth, we believe that a narrowing focus will serve it well over the long haul.