Shrewdly buying, selling and pruning assets, General Electric Co., the huge American conglomerate, has defied the conventional wisdom that big companies cannot grow.
In so doing, Fairfield, Conn.-based GE, which makes everything from light bulbs and aircraft engines to television programs, has become a favorite on Wall Street.
One of the largest U.S. companies, with annual sales of nearly $39 billion, GE is poised for strong, steady earnings growth of 10% to 15% a year into the 1990s, Wall Street analysts say.
In a rash of acquisitions and sales, GE has shifted from slow-growth, low-margin areas like small appliances into fast-growing medical products, plastics and other businesses.
In the 8 years since John Welch became chairman, the company has spent $16 billion on asset purchases and received $9 billion from selling operations.
Most of the deals have worked well, quickly feeding earnings to GE. Analysts point to last year’s $2.3-billion purchase of Borg Warner Corp.'s chemical business and the $6.4-billion acquisition of RCA Corp. in 1986 as examples.
Not so the 1986 purchase of Kidder Peabody. GE bought 80% of the brokerage and investment banking firm for more than $600 million only months before the insider trading scandals broke and the year before the stock market crashed.
“They were too hungry to get into the brokerage business--they bought at the peak of the market and they overpaid,” said Linda Shuman of Prudential-Bache Securities.
But aside from embarrassment for Welch, the Kidder deal is not seriously damaging to GE. “Their immediate task is to fix it, but if that doesn’t work over the long term they may sell it,” said David Gardner, an electrical research analyst with Nomura Research.
“But Kidder won’t have a noticeable impact (on GE) because it’s so small,” he said. “The whole thing’s been blown way out of proportion.”
Despite problems at Kidder and in other areas, such as the NBC television network and the defense market, the breadth of GE’s business mix cushions it against weakness in one or more areas, analysts said.
“Their strengths are their management and their capital,” said one money manager who sees 1989 earnings rising to $4.20 a share from $3.75 a share in 1988. The company earned profits of $3.39 billion last year.
“They now dominate in fewer (industry) markets but are much more significant on a global basis,” said Nicholas Heymann of Drexel Burnham Lambert. GE’s constant fine-tuning of assets has yielded a more efficient earnings machine, he said.
“Welch has turned it into a much less capital-intensive company, kicking off more cash and growing at a faster rate,” said Heymann, who predicts earnings will grow an average of 13% to 15% for several years, versus 10% to 11% in the last few years.
Earnings in the fast-growing plastics, medical systems and finance areas should grow 15% to 25% a year, analysts said. In addition to Kidder, the financial services unit includes GE Capital, a lessor, lender and merchant bank, and Employers Reinsurance, acquired in 1984 for $1.1 billion.
GE’s defense and aerospace business, including missiles and communications systems, could be vulnerable to cuts in defense spending. But GE is generally well-positioned, and probably will not be hurt too badly, one analyst said.
In aircraft engines, GE has taken market share over the last few years from Pratt & Whitney, a competitor owned by United Technologies Corp. But some analysts say that Pratt is fixing service problems and has won back some key customers.
NBC, acquired with RCA in 1986, is suffering from a soft advertising environment and growing competition from cable television, which is stealing viewers from the networks. But NBC is cutting costs, has sold some radio operations and is moving into cable television through joint ventures like CNBC, a cable news show.
Last year GE bought Roper Corp. to strengthen its major appliance business, where price competition is stiff. “It’s strategically important because it gets them into the gas cooking business and it gets them into Sears,” said Russell Leavitt of Salomon Brothers.
Given its excellent credit rating, analysts said GE could make a large acquisition along the lines of RCA. “But there’s no sense of urgency,” said Leavitt, who says small acquisitions and joint ventures are likely.
The company’s size has scared away some investors. “It’s very big and it’s hard to believe that big can grow,” said one money manager.
But even so, many analysts are optimistic and have recommended the stock, which was unchanged Wednesday afternoon at $45.25. “People who are close to it have a favorable bent on it,” said Prudential-Bache’s Shuman.