General Electric Company (GE)

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General Electric Co. (NYSE: GE) is a multinational conglomerate that manufactures large-scale industrial products, produces consumer appliances, and provides financial services. GE's operations now span the financial services, energy, industrial manufacturing and healthcare. In 2010, GE was ranked the second-largest company in the world by Forbes based on a formula that included sales, net income, assets, and market capitalization.^[1]

GE's diversification provides the company with a degree of protection against poor performance in any business segment. Additionally, GE's size enables it to buy and sell companies at opportune times, taking advantage of favorable market conditions. Acquisitions contributed $0.5 billion to net income and $3.4 billion to consolidated revenues in 2009. ^[2] The company aims to integrate acquired businesses as quickly as possible.

General Electric has announced a new overall strategy of focusing on its healthcare, engine, energy, and other core manufacturing businesses instead of its service-oriented businesses like GE Money and NBC Universal.^[3] In October 2010, GE Healthcare announced it would be acquiring Clarient (CLRT), a molecular diagnostics firm, for $587 million in cash.^[4] The company hopes that the deal will diversify its revenue base and push further into the medical imaging space.

This strategy change comes at the heels of the 2008 Financial Crisis, which has had a sizable effect on GE, since the company usually generates nearly a third of its revenue from GE Capital Services (GECS), the company's financing arm.^[5] On March 12, 2009, S&P downgraded GE to a "AA+" credit rating from its long-held "AAA" rating, citing increased uncertainty relating to GE Capital. GE's prospects are largely tied to the strength of the economic recovery.

Company Overview

News Updates

• GE tentatively agreed to a union deal in which $5,000 cash payment to each worker upon ratification and annual wage increases of 2.25 to 3 percent over the next four years. The deal would cover 15,200 union-represented GE employees out of 133,000 total employees in the U.S.^[6]

Trends and Forces

Maintaining flexibility through acquisitions

As a large conglomerate with substantial purchasing power, General Electric employs a strategy of acquiring and selling off companies to maximize revenues at any given time. By using this strategy to enter and exit various industries, GE adjusts its portfolio of offerings in order to take advantage of profitable conditions in any one market or industry. For example, improved fuel efficiency in airplane engines has reduced commercial airlines' operating costs, allowing them to expand their fleet of airplanes. GE has responded to this trend by expanding further into the engine production and airplane leasing businesses.^[7] Some notable acquisitions in the past several years include:

• Healthcare
  • GE's acquisitions of Amersham in 2004 and IDX Systems in 2006, which manufacture products used in health care, have helped expand GE's presence in the industry.^{[8] [9]} Revenues for GE's healthcare segment have since increased from $15.0 billion in 2005 to $17.0 billion in 2007. ^[10]

• Plastic business
  • GE Supply and Advanced Materials was sold to offset the losses resulting from the price inflation of raw materials, natural gas, and benzene. Unpredictable commodities prices have made it difficult for GE to achieve predicted earnings, driving the company to sell its plastic business. SABIC is 70% owned by the Saudi government, however, which could politicize the issue and present an obstacle to closing the deal. ^[11]
• Insurance
  • GE has been selling off its insurance businesses in order to concentrate on expanding its other divisions' presence in emerging markets. With the sales of GE Life, GE Insurance Solutions, and Genworth, the company completely exited the insurance business in 2006.^[12]

GE Revenue % by Region^[13]

Focus on International Growth

GE has been greatly expanding its presence across the world, particularly in emerging markets. International markets often provide higher growth potential, driving GE's push into new geographic regions. One particular area with high potential for international growth is cable and television programming, where GE operates 15 cable and satellite brands operating in over 100 countries.^[14] Management hopes to double its cable revenue to $500 million. ^[14] In October 2009, CEO Jeffrey Immelt said the company may double revenues from India to $6 billion in the next 3-4 years. ^[15]

Though global expansion offers the possibility for higher revenue growth, there are also some risks involved. Laws and regulations, which differ from country to country, can significantly impact GE's performance. For example, in December of 2006, Japan passed a law that lowered the maximum interest rate lenders (such as GE) can charge and put limits on consumer borrowing, leading GE to divest its Japanese businesses.^[16]

Sensitivity to U.S. dollar

GE does the majority of its business outside of the U.S., earning its revenue in a variety of different currencies. As a U.S.-based company, however, GE's revenue is reported in U.S. dollars. Fluctuations in the dollar's exchange rates can substantially increase or decrease GE's revenues (as reported in USD). In general, a weakening of the US dollar is beneficial for GE's international operations. As the value of the dollar falls, any given amount of foreign currency converts to a larger number of USD (in nominal terms). Since its revenues are counted in USD, this can boost GE's revenues. If the dollar's value increases, however, income in other currencies yields fewer USD, which can negatively impact GE's revenues.

Growth through Acquisition and Sales of Underperforming Units

GE has adopted the strategy of selling off product lines with limited growth potential, which so far has included the sale of GE's private label credit card, bad mortgage and loan businesses, and the company's consumer finance unit in Japan, and refocusing on areas of potentially higher growth, such as water treatment or aviation. ^[17] In December 2008 GE Money sold its Wizard Home Loans brands along with $4 billion in mortgage debt to Aussie Home Loans in an effort to withdraw from the residential mortgage business and limit the company's exposure to the housing crisis. ^[18]

Environmental Leadership

In May 2005 GE announced the launch of a "Ecomagination" program intended to develop tomorrow’s solutions such as solar energy, hybrid locomotives, fuel cells, lower-emission aircraft engines, lighter and stronger durable materials, efficient lighting, and water purification technology.^[19] The bulbs are rated 8000 hours and guaranteed for five years. The company's increased emphasis on clean technology is an aggressive initiative to bring new technologies help consumers meet pressing environmental challenges. ^[20]

Competition

GE competes against a number of other companies, but most of them are more specialized, focusing in one industry. GE's operations, on the other hand, are spread across many different industries, limiting its exposure to competition from any one company.

References

1. ↑ Fortune Global 2000
2. ↑ GE 2009 Annual Report, p. 29
3. ↑ WSJ, "The Usual Merger Suspects"
4. ↑ GE to Buy Clarient in $587 Million Deal WSJ
5. ↑ GE 2008 10-K
6. ↑ Reuters "GE labor deal calls for cash payment, pay hikes"
7. ↑ GE engine production up, orders down in ‘08
8. ↑ GE completes Amersham acquisition
9. ↑ GE Healthcare Completes Acquisition of IDX Systems Corporation
10. ↑ GE 2007 Annual Report, Note 25, page 98
11. ↑ SAUDI ARABIA - The SABIC Perspective.
12. ↑ New York Times, "G.E. Completes Its Exit From Insurance Industry"
13. ↑ GE 2007 Annual Report, page 51
14. ↑ ^{14.0 14.1} GE 2007 Annual Report, Letter to Investors, page 6
15. ↑ Bloomberg "GE’s Immelt Says Emerging Markets ‘Doing Very Well’"
16. ↑ MarketWatch, GE Consumer Finance latest casualty of Japanese crackdown
17. ↑ Morningstar analyst report, 24 Nov 2008
18. ↑ AAP Aussie Home Loans buys Wizard from GE Money Australia, Commonwealth Bank to buy $4bn in mortgages
19. ↑ New York Times, "It's Getting Crowded on the Environmental Bandwagon"
20. ↑