GE Could Double Down On Conglomerate Status: A Buyout Of United Tech

GE (NYSE: GE) has decided to maintain its position as the world’s largest conglomerate. It is old news that the company has been attacked for this. Recent evaluations of the one-decade tenure of CEO Jeff Immlt were unkind. The GE stock price since uber-CEO Jack Welch left has shredded Immelt’s image.

GE bought part of the John Wood company that services the oil industry for $2.8 billion. It may slightly help GE’s energy business, but the effects will be small.

Immelt and his board have been attacked for half measures. GE has gotten rid of most of its stock in entertainment business NBCU. Immelt practically promised he would never sell the operation, and then jumped at a reasonable offer.

GE’s composition has not changed much from the company Welch built. It has been reorganized some but not enough to matter to Wall St. GE’s board likes the conglomerate business, so it is time to show that the faith in the structure is well place

The largest conglomerate in the US after GE is United Technologies (NYSE: UTX). The company has been more successful than GE in stock market performance over the last decade.  Its Otis, Carrier, UTC Fire & Security, Pratt & Whitney, Hamilton Sundstrand, and Sikorsky units overlap with GE in the aircraft industry. Otherwise, United Technologies is not like GE. The theory behind the success of a conglomerate is that when one part of the company is doing poorly, other units can lift overall earnings. If that is true, the larger and more diverse the conglomerate the better.

United Technologies is strikingly profitable. It made $4.4 billion last year on revenue of $54.4 billion. It has a pristine balance sheet with $4.1 billion in cash and only $10 billion in long term debt as of December 31.

GE would probably have to pay close to $100 billion for United Technologies. GE’s market cap is $240 billion. A transaction would mean a complete restructuring of the GE balance sheet. Investors would wonder if the potential debt burden from a United Technologies buyout would be too much. But, GE has religiously stayed with the conglomerate model and it might as well show the market how deep that commitment really is.

Douglas A. McIntyre