Monday, May 28, 2007

GE's dilemma A Wall Street Journal article, "Placing Value on GE's Parts", 5/22/07) brings up the question that torments all conglomerates. The article notes that the recent sell-off of General Electric's plastics division to Sabic for $11.6 billion surprised analysts, who has estimated the worth of that division to be around $8 billion. For many, it now looks as if the parts may be worth a lot more than the whole. As the article points out, GE under CEO Jeff Immelt has in some senses done very well over the last five years, with nearly 70% increase in profit, to a total of $23 billion per year. On the other hand, the company's market cap has not grown, nor, to any significant extent, its stock price. The article predicts that once the perception grows that there's lots of value locked up in the parts, investor will put heavy pressure on GE. "Mr. Immelt will need to act fast. Companies that trade at a discount to their parts are prime targets for activist investors. Mr. Immelt should consider spinning off businesses such as GE Money and NBC Universal, before uppity investors dictate a more-Draconian corporate strategy for him. GE has been blessed as one of the few conglomerates in recent times that have managed to steam forward while keeping its hands in many businesses, from light bulbs to TV, from jet engines to commercial credit to hospital technology. It has done this by a combination of famous management practices and judicious acquisition and de-acquisitions of businesses and products. But those days may me soon over. Ironically, Immelt's success at getting a great price for what was judged a non-core division may lead to the breakup of the whole company. The lesson is, as with so many other companies from Sara Lee to Vivendi and many others, running multiple business with different timetables and ROI expectations is very hard. And to investors, it always looks like the lesser performers are dragging down the better ones. Conglomerates, when they are public companies, are inherently unstable. Even GE is vulnerable when the growth imperative comes into play. Could GE be the next Gulf + Western? 11:49:36 AM

comment []