Tuesday, January 23, 2007

“Will That Be Private Equity Paper, or Plastic?”

Sara Michelmore, Cowen: "My question was specifically to the molecular business…I assumed if it had been available for sale that GE would have been interested in it."

Miles White, Abbott Labs: "That’s a good assumption."

—Abbott Conference Call, 1/18/07

I don’t know about anybody else who listened to that call, but the folks at Abbott sure sounded to me like they pulled off a good one by selling the least valuable bulk of their clinical diagnostics business to GE for a cool $8 billion.

Certainly Abbott CEO Miles White, as the above dialogue demonstrates, made it clear on the call he thought he was keeping the good, faster growth stuff and selling the plain-vanilla, lower growth stuff.

Funny thing is, that’s exactly what Jeff Immelt was telling Wall Street’s Finest the very next morning, during a conference call to discuss earnings and some details on the multiple acquisitions he recently pulled off, including the aforementioned deal with Abbott.

Now, the $8 billion Immelt agreed to pay amounts to roughly three times 2006 sales for the Abbott businesses, and a whopping 25 times their 2006 operating income, based on numbers provided by Abbott and later massaged by Wall Street’s Finest—yet nowhere in the GE earnings conference call did the phrase “25 times operating income” come up.

Of course, Jeff Immelt didn’t get to where he is by being an easy mark for companies desperate to sell their losers, and his healthcare team made a good case for getting sales and margins of the acquired Abbott businesses up substantially by “Year 3,” to the point where the deal price would look like a more comforting 11 times operating income, based on my math.

Furthermore, Immelt certainly knows a great time to sell the dregs of his own portfolio when he sees it.

Private equity buyers need to do deals, if only for the sake of doing deals, so why not swap a cyclical, low-multiple-from-Wall-Street business (GE Plastics) for a stable, value-added, long-term grower (Abbott’s diagnostic business) for roughly equal multiples of future operating income?

But Jack Welch’s successor better hope for two things:

1. His healthcare team comes through with those “Year 3” numbers on the Abbott business, and;

2 The buyers of GE Plastics don’t make the same kind of quick killing the Hertz buyers did when they picked off poor Bill Ford.

Otherwise, Immelt’s own words from last week’s conference call could come back to haunt him:

When you see us do or see me do $15 billion in two weeks, sometimes you say is he crazy? But this is all part of a 5-year disciplined, diligent, long-term focus on the company and I just want to give you a sense for that. And basically on strategy. You know, redeploy from slow growth into high growth and a real target on health care and infrastructure.

Jeff Matthews
I Am Not Making This Up

© 2007 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


Sam E. Antar said...


"Private equity buyers need to do deals...."

My response:

Beware investors, the abstractionist capitalists with their finance MBAs, flow charts, and pretty looking projections, little if any real world business experience are taking over the economy.

All too often they think about business in terms of financial engineering, mathematical formulas, and theories from text books and best sellers. A great man once told me, he never saw a projection or proposal that did not look good.

So, those who read through the glossy well written plans and beautifully designed charts and later decide to invest beware, understand it’s your blood and money and their guts.

Therefore, carefully understand who is taking most of the risks relevant to the upside. It is you. Carefully consider the relevant experience of who is behind such funds. Yes, read the fine print and not the charts first.

Sam E. Antar (former Crazy Eddie CFO & convicted felon)

PS: Jeff: I am not making this up. I dealt with a lot of these characters already. Some are good, many aren’t too smart.

Aaron Koral said...

Jeff: I read the transcript of the 01-19-2007 conference call with GE. Here were three things I never knew about "the meatball":

A) I never knew that a restatement based on FAS 133 (Accounting for Derivatives - i.e., interest rate swaps) could "bring good things to life"; namely, a rise in earnings between 2003 and 2006. GE should thank the auditors at KPMG for such "lovely" results!

B) You know how many times the word "growth" was used in the conference call? 103! I wonder what GE was trying to get across to its investors, especially when trotting out Joe Hogan, the CEO of GE Healthcare? Talk about things that make you go, hmmmm!

C) They talk about selling plastics because of its unpredictability in earnings. Why don't they sell the commercial real estate portfolio instead to a company like CB Richard Ellis for some "extra coin" and use the proceeds to smooth out the volatility in earnings from plastics? Just wondering....

BTW, I thought Citigroup analyst Jeff Sprague's questions were good ones on identifying what factors GE considers (i.e., using cash, keeping its AAA debt rating, etc.) when making potential acquisitions.

On the flip side, though, I thought the analyst (who shall remain nameless) who "struggled with his numbers" and asked what Abbott's consent decree was about, truly did sound like a "moron". I guess he forgot to do a Google search before participating in the conference call.

One quick question for you, though, Jeff - isn't it possible that GE could wring out significant cost savings from the Abbott deal and, despite having to deal with the consent decree, have future earnings growth from the diagnostic business justify the price GE paid for the business? I mean, GE did it with its acquisition of Amersham - couldn't they do it again? Just wondering....

In the spirit of your mantra, I am not making this up - readers can see for themselves by clicking here to read a copy of the transcript.

Its_strange said...

The trouble with not doing deals with fancy charts and theories is you don't get on CNBC , you don't have a chance to become treasury Secretary....Yes, this " celebrity culture" we have has worked its way into every facit of life. ..Jack Welch recently defended Nardelli's severance package saying CEOs are like Rockstars. ...Well i recall some of the benefits he got from GE when he left..I was taken back how "small" and "henhouse" i thought he was. ...Free meals, free this, free that. But with CNBC blowing smoke at him everyday i thought he was going on to become treasury secretary.