GE shareholders get a little too deal-happy again
General Electric’s shareholders seem curiously overjoyed to see the conglomerate back in shopping mode. They added nearly $4 billion to GE’s market cap on Wednesday, when the company splashed out $3 billion on an energy infrastructure business, confirmed its interest in a British maker of oil pipes, and snapped up a package of some of Citigroup’s more questionable loans. It’s a change from years on the back foot selling assets. But the celebration looks overdone.
GE, under chief executive Jeff Immelt, has overspent on takeovers in the past, and it’s hard to get a handle on whether or not it is bringing newfound discipline to its mergers and acquisitions machine. That should matter to shareholders. The fallout from past missteps, overlaid with the financial crisis, has cost GE’s owners some $250 billion in lost market value over the past three years — almost the exact equivalent of Apple’s entire market cap.
Immelt’s purchase of Dresser doesn’t at first sight look like the most lucrative step back into the deal businesses — though it’s hard to be sure, as GE isn’t saying much about Dresser’s financials. It says the business had 2009 “earnings” of $318 million. Assume that’s pretax income, as Credit Suisse suggests, and that the purchase price includes any debt, something GE hasn’t confirmed. That would equate to an after-tax annual return of just around 7 percent absent any synergies. That’s not terrible, but it’s less than the 9.2 percent at which Morningstar estimates GE’s weighted average cost of capital.
Then there’s the conglomerate’s interest in Britain’s Wellstream Holdings, which makes bendy pipes used on offshore oil rigs. The company rejected GE’s 755 million pound offer. Fold in Wellstream’s debt, tax its 2011 operating income as estimated by Thomson Reuters, and the return on that deal would have come in at 4.5 percent. Of course, as with Dresser, there may be synergies that GE can extract. But they’d need to be hefty for a Wellstream deal, at current prices, to meet GE’s cost of capital any time soon.
Of course, shareholders may simply like the fact that Immelt is showing some confidence. Or maybe, when it comes to GE’s deal-making past, they just have short memories.