GE Would Gain Risk With Assets
Even if they’ve never set foot in Universal City, millions of Americans have a keen interest in General Electric Co.’s tentative deal to manage Vivendi Universal’s film and television assets.
GE’s stock is among the most widely held in the country, with about 10 billion shares outstanding that have a combined value of $300 billion. People own the company directly or through their pension plans, 401(k) savings programs and mutual funds, in which GE is a staple.
Those shareholders could be treated to a new risk, now that GE has reached a preliminary agreement to merge its NBC assets with Vivendi’s entertainment operations, including movie studio Universal Pictures and a TV unit that owns three cable channels and produces the “Law & Order” franchise.
If NBC and Universal tie the knot, will GE, an enormous conglomerate and paragon of management discipline, be able to tame Hollywood’s renowned volatility and bolster its own sales and profit?
The question is especially relevant now because GE’s growth -- for years a marvel of consistency -- has slowed sharply since 2001. So ubiquitous is GE in the lives of consumers and investors that its slowdown was front-page news.
That put pressure on GE and its chief executive, Jeffrey Immelt, to turn things around. And now the Fairfield, Conn.-based company could be poised to assume what might be a lot more risk by adding Universal to its widely diversified stable of industrial, financial and broadcasting properties, led by NBC.
To be sure, GE remains one of America’s most profitable companies, and NBC has been one of its bright spots in recent quarters. What’s more, a combined NBC-Universal would represent only a small percentage of total GE sales, which were $132 billion in 2002.
The tentative deal was sealed Tuesday, when Vivendi’s board of directors agreed to sign a nonbinding letter of intent to merge its movie studio, TV unit and theme parks with NBC’s broadcast network and cable channels. Vivendi would receive a 20% stake in the combined operation, which would be managed and controlled by NBC.
At first glance, GE and Universal would seem to be strange bedfellows. GE prides itself on steady, almost predictable growth and applies rigorous financial and management discipline to all its operations.
Like most studios, Universal is a much more hit-and-miss enterprise, even though its management is highly regarded by GE. The studio and TV unit spend millions of dollars on films and TV shows that could be smashes or flops -- Universal seldom knows in advance.
“Movie studios are a longshot for anybody,” said James O’Toole, a USC business professor who studies GE and other conglomerates. “Don’t forget, there is a little bit of an art to it. You can’t make money just by cutting costs.”
Besides NBC, GE’s entertainment group includes cable outlets CNBC, Bravo and MSNBC (with partner Microsoft Corp.); Spanish-language broadcaster Telemundo; and more than a dozen TV stations. But NBC is the only major U.S. network that isn’t directly linked to a major movie studio, leaving it to rely on outside producers for films and programs.
That’s a key reason Immelt, who succeeded Jack Welch two years ago, sees Universal as worth pursuing. Even though Welch bought and sold hundreds of companies during his 20-year tenure, he never acquired a film studio.
Immelt too was cautious about Hollywood. Just a year ago, Immelt said in an interview with Electronic Media that GE didn’t have the appetite to buy a studio or cable assets. “I just don’t think it’s us,” he said.
But he ultimately gave Bob Wright, a GE vice chairman and NBC’s chief executive, the green light to negotiate with Vivendi. Immelt was swayed by Wright’s arguments that NBC needed to bulk up to compete in an entertainment world that’s increasingly “vertically integrated,” with the same company making films and programs, or content, and distributing them, according to sources familiar with GE’s thinking.
“People are either big into producing content or big into distribution -- and we’ve elected to be big in content,” Wright said during an interview Tuesday.
Robert Friedman, who follows GE for Standard & Poor’s Corp., said that by merging with Universal, “NBC would be able to gain a relatively steady stream of content” in terms of Universal’s movies and TV shows, “and so it wouldn’t be at the mercy of independent producers.”
Another reason the merger would be good for NBC is the rapid growth in the popularity of DVDs, which has reduced the risk of financing multimillion-dollar movies. The DVD craze also would boost profit from Universal’s vast film and TV library.
The merger “would make NBC broader and deeper in content and stronger in a digital world,” Wright said.
GE believes that merging NBC with Universal could unlock significant value for the network, a key engine of the growth GE still enjoys. Immelt’s goal wasn’t to simply own any studio or take a radical step outside of Welch’s shadow, the sources said, but rather to exploit the opportunity Universal presented.
“This was an opportunistic situation -- they put themselves up for sale,” Wright said. “But it works for both of us. If we do well, then we’ll both make a lot of money.”
In the first half of this year, NBC and the rest of the entertainment group had sales of $3.4 billion -- only 5% of GE’s $63.8 billion in total revenue. But the group contributed 11% of GE’s pretax operating profit, and the group’s own earnings surged 20% from a year earlier.
That’s evidence of how well GE can manage highly creative businesses such as film and TV, said Noel Tichy, a University of Michigan business professor and former GE manager.
“What GE brings to the party is incredible discipline around developing people and getting a good return on invested capital, which means not wasting money,” he said.
GE’s yen for Universal and Immelt’s gambit underscore an old truth about large companies: Even the best-run conglomerates must constantly reinvent themselves if they hope to keep growing. GE and Immelt are often characterized as risk-averse or cautious, but GE has a history of making some radical moves to nurture its growth.
That’s just what Welch did in 1986, when he led GE’s purchase of NBC and its parent, RCA Corp., to reduce GE’s reliance on manufacturing. The move stunned the business and entertainment worlds, and for years NBC struggled under GE’s ownership. There were recurring rumors it would be sold. But NBC ultimately prospered.
Nonetheless, some remain skeptical about a GE-Universal marriage, especially with GE’s stock still trading well below the $60 a share it reached three years ago.
GE shares Tuesday rose 87 cents to $30.44 on the New York Stock Exchange.
The skeptics noted that other well-regarded industrial companies -- Coca-Cola Co. and Matsushita Electric Industrial Co. among them -- ran movie studios for a while and ultimately threw in the towel, burned by the film industry’s profligate spending and uncertain success rate.
“It’s not just cost cutting” that makes a studio successful, said Friedman of Standard & Poor’s. “It’s also making sure you’re allocating your capital to the right projects. And that’s the $64,000 question for GE: Will this or that project hit a chord with the public?”
Times staff writers Richard Verrier and Meg James contributed to this report.
