In this article, we explain how smart acquisition ignites another long waited innovation by Apple. Also, it shapes a new landscape for the whole chip industry. Continuing topics about GCG in Acquisition, we bring you another prestigious name: GE. But this case is the opposite of Apple.
As a response to company operations that are too complex, unfocus, in November 2017, John L. Flannery – Chairman & CEO of General Electric Company said: “Complexity hurt us”.
And the shareholder said so. In October 2007, the GE market cap hovered at 420 Billion. During 14 years journey to 2021, The “Alfa Edison” loss 300 Billion. A spectacular number given Disney, Netflix, Salesforce market cap is at the 300 B level. So, what happens?
In This Issue
Overview of GCG in Acquisition: GE Case
Besides GE’s weird accounting practices, a key factor that deteriorates the company is its transformation to become an inefficient conglomerate. An entity with too many business segments, too many operations, bureaucrat, but not translate into financial performances.
And GE become that inefficient through many miscalculated acquisitions.
GE was born as a light bulb company. At that time, GE was closely identical with innovation – Edison’s company. You can say it looks like Tesla’s Musk today or Besoz’s Amazon. Or Steve Jobs. Also, GE ever become Wall Street darling in its glorious days – like Amazon, Apple, Tesla. GE then grows as a manufacturer of Jet Engine, Turbine, MRI scanners. Furthermore, it also swallows media companies, oil, and other power division from a competitor. GE also builds financial division. The management formula is simple, the winner takes all, but it turns that GE takes nothing.
When Acquisition Become Wrong
The bigger, the better. Isn’t it? Consider this to change your perception of that adage:
- There is an efficient number you can control. More than this, You will be exhausted. You can control one, two, three business segments. But the fourth brings you to unfocus, careless – tired.
- No matter how good is business, it doesn’t deserve unlimited valuation – said Munger. GE management seems never learned this lesson. They paid too much for a certain entity. Simple said: High cost, low return.
- When the acquisition is too high, it is often funded by debt. Unfortunately, if not managed properly, it could slash earning and in turn, erode shareholder value.
- Sometimes, the acquisition doesn’t strengthen you. In some case, it weakens the whole company. The smart acquisition is the integrated one.
We Are General Electric
GE is irrelevant today. True. Then why does investingdeck.com keep posting this artifact? Show us Tesla, Amazon, Apple, Palantir.
Because GE lasts for years and may become a good example of the corporate life cycle. It lives through a growth phase, maturity, and declines. Someday Amazon will follow GE’s path to life beyond its core business. When the market is saturated, a company needs to seek another source of growth. Tesla will face it. Apple too. Microsoft.
Any.
Company.
Will.
Timing and Cost of GCG in Acquisition
Alstom
At a glance, the acquisition of Alstom seems a good idea. Both GE and French-based companies are turbine engine makers. Taking over Alstom means expanding its market share significantly. GE has a 50% market share in the turbine industry, to outpace this number, GE needs an external source of growth. Then management looks at Alstom as a perfect acquisition. It is in Europe, thus could help GE reach the market outside the US.
10 Billion deal seems logical due to the calculation that it will cut the cost to 3 Billion in the next 5 years.
It just didn’t happen.
If I may recall, 2015 is the beginning of the downturn of commodity prices. Coal is oversupply, oil is oversupply. Massive transition to renewable energy and tepid global economic growth are factors behind the low price of commodities. GE Alstom excels in making turbines for coal power plants. This circumstance isn’t good news for them.
But, didn’t management capable to read this?
GE’s GCG in Acquisition of Baker Hughes
Another perfect timing for buy. GE acquire Baker Hughes, Oil services Giant in 2017. – following 9 acquisitions of Oil&Gas related companies. You know the story – the crash of Oil and Energy market. Another disappointing decision -another poor timing.
GE’s GCG in Acquisition of Subprime Mortgage
Rolling back the time to the subprime mortgage crisis, we find another blunder by GE. The company seems a perfect poster child of the “Selling Low Buy High” mindset. In 2004, GE dealt to purchase WMC, a subprime mortgage company that as you’ve expected – end terribly.
GCG in Acquisition is Needed For Corporate To Life Beyond.
You see a careless decision, miscalculation, mismanagement – it is true. But we look at it deeper. It starts when GE needs to live beyond its core business. It is a logical option when you see sluggish growth in your industry. Furthermore, It is painful, but the game needs to play on, it has to pursue another field.
Transformation
At the end of the day, you need to be bigger. Every company needs to transform itself as the answer to heating competition. Apple transforms from a Computer company to Consumer – Ecosystem company. Microsoft tries to live on its CLoud. Amazon struggle to eat everything I could. Google wants a physical presence through Pixel and Fitbit. Visa and MasterCard won’t extend the Card to the Payment Platform. Nvidia changes from a gaming graphic card company to an AI company.
Every company needs to transform.
And the transformation isn’t always smooth.
We worry about Microsoft. Amazon.
Divestiture. Spin-Off. Relentless Innovator.
As you have read in other resources, GE admit its mismanagement and began to divest its acquired company. To make its balance sheet healthier, GE tries to become simpler and more focused on its core business. And for the investor, in the next years, GE plans to spin off its business segment – our favorite is GE Healthcare and GE Aviation. If GE said complexity hurt them, making a simpler business entity will be the right answer.
Moreover, GE also become more careful in its acquisition decision. In the last years, it purchases smaller companies with a small budget. And in our perspective, the acquisition also becomes more integrated rather than “just go big” like the guy in the gym barking about his biceps.
The healthcare sector become one of the most strengthened parts of the new GE. In the last few years, it acquired:
- Prismatic Sensors that designated to make GE’s CT scans more accurate. It is based on photon counting that brings a new age of CT technology.
- Zionexa, we don’t know what it is, but it will be something about biomarkers. Another life after the sale of Danaher? We don’t know.
- Big boy, BK Medical that cost 1.45 Billion. The company visualizes the surgical process using ultrasound. This makes the GE scanner portfolio more advanced and integrated.
Seems GE try to follow Apple’s path when acquired Intrisity and Palo Alto semiconductor.
Point To Remember
Let’s get to the point.
It is not about GE. It is about the corporate life cycle. Sooner or later, GE’s problem will be another company problem. When it becomes too big to move. We worry about Microsoft, maybe Amazon to some degree. Microsoft seems to have a weird hobby to make loser deals. Nokia. LinkedIn isn’t optimal yet, GitHub seems great but still, Microsoft doesn’t pull out its maximum benefit.
At the end of this article, we warn investors about too pricey acquisitions – that gives the company a bigger scale but is unnecessary. It is not about being big.