The Cable Gamer has believed for years that GE would break up, spinning off its various assets, including its media properties, NBC, MSNBC, CNBC, etc. My original prediction was that GE would break up after the 2008 election, and I am convinced that such a breakup was in the cards, until the Wall Street meltdown. Ironically, the worse the news, the better for a conglomerate dinosaur such as GE, which benefited from a Federal Reserve subsidy in October and then from a $139 billion loan guarantee from the Federal Deposit Insurance Corporation in early November (and all this time I thought that the FDIC existed to help out small savers; who knew that they were in the business of bailing out billion-dollar companies?).
And in fact the stock, which had been at 60 early in this decade, bumped up for a while, to a high of 20.77 on November 4, but now it's down, below where it was at the time the feds started bailing it out. It closed at 14.11 today.
You might say that it takes some serious mismanagement to get hundreds of billions in federal aid, and yet still be in the toilet, but that's a sign of how badly mismanaged the company has been.
Enter the Motley Fool's incisive Alex Dumortier, with a sharp analysis of GE's situation:
However, in the context of the post-bubble environment of conservatism and transparency, there is an elephant in the room: GE Capital, the firm's financial arm.
GE Capital: The elephant in a credit-constrained room
The creature comparison is appropriate. With $680 billion in assets, GE Capital Services was bigger than Wells Fargo (NYSE: WFC) at the end of last year. Wells Fargo is one of the nation's largest lenders. Among those assets are $51 billion in real-estate debt securities. Investors are now much less forgiving when it comes to this level of risk and leverage than they were two years ago.
That is, GE is burdened by its GE Capital subsidiary, which is still in trouble despite all its bailouts.
Then the Fool asks, "Is GE Cheap Enough?" and offers this answer:
When a market leader like GE underperforms its industrial peers, it's strongly suggestive that GE Capital is the basis for a conglomerate discount. That would be entirely consistent with the investor risk aversion that is dogging virtually all financial companies right now. This represents a return to order; after all, GE Capital's earnings are higher risk than those of GE's other business lines.
One could argue that this discount won't persist indefinitely and it shouldn't be the basis for a major corporate restructuring. Perhaps the former is true, but I believe that a GE Capital-related discount is warranted, regardless of the environment.
In some sense, an investment decision always comes down to price in that there is always a price at which any asset is a compelling investment. I'm not a huge fan of GE because of its size and complexity, but I have to recognize that we may now be approaching levels at which the risks of GE Capital are more than accounted for. GE shares now look likely to provide adequate long-term returns for investors; if the share price were to remain at this level for a sustained period, the breakup logic would certainly gain weight.
In other words, so long as GE stays at 14 or so, well, it might not need to be broken up. But if anyone wants a higher stock price, well, then better bust it up.
If Jeff Immelt can wrangle some more bailouts--and Barack Obama certainly owes him for the shameless pro-Obamatry we have seen on MSNBC and to a lesser extent the other NBC-Universal media properties--then the breakup can be postponed indefinitely. But if not, if there's an upward limit to Congress' appetite for subsidizing big companies, then GE will be deconglomerated. That seems to be what's happening to Citi.
So Jeff Immelt, meet Vikram Pandit and all the other knowitalls who got greedy and got burned, beyond even the ability of Uncle Sugar to bail them out.
