Money Matters - Simplified

General Electric Wants to Be a Millionaire

 A few months back, you see, GE Vice Chairman John Rice promised to spend $30 billion over the next two to three years in an effort to reinvent the company. The goal: to leave behind the days when GE's consumer finance business drove its growth efforts (into a ditch), and return to the company's roots as a maker of "stuff."

GE's been quick (if not always consistent) in putting its plans into action. First the company bought $1.6 billion worth of credit card receivables (!?) from Citigroup (NYSE: C). Then it purchased Dresser, putting itself in competition with major oil-and-gas industry players Schlumberger (NYSE: SLB) and Baker Hughes (NYSE: BHI). Hardly pausing for breath, GE promptly plunged into a $400 million-plus investment in revitalizing its appliances division, and pledged to spend upwards of $750 million to purchase electric cars from General Motors(NYSE: GM) and its car-making peers. Very roughly, therefore, I'd say GE has spent, or committed to spend, close to $6 billion worth of the cash involved in its $30 billion two-year-plan.

Make that $7 billion
This week, GE announced the next step in its reinvention effort -- a $1.3 billion deal to acquire Wellstream Holdings PLC. Complementary to GM's Dresser purchase, Wellstream strengthens GE's energy business -- and does so in a particularly promising geographic area: Brazil. Wellstream, you see, manufactures flexible pipes and risers well-suited to the deep-sea oil exploration efforts of ExxonMobil (NYSE: XOM) and Petrobras (NYSE: PBR) off the Brazilian coast.

With GE's stock now entering its second day of post-acquisition-announcement losses, it appears investors aren't thrilled with the acquisition. It's not hard to see why -- at 2.1 times sales, GE is paying nearly a 70% premium to its own P/S ratio. And yet ... I'm honestly not sure this is as bad a deal as most folks seem to think. For one thing, Wellstream is a more profitable operation than GE proper boasting 11.3% operating margins (versus GE's 9.7%.) For another, in buying Wellstream, GE is expanding its second-most-profitable business; historically, GE has reaped 18.4% operating margins from its energy infrastructure division.

Seems to me, if GE is intent on spending its billions, then focusing on what it's best at is a smart way to go about it.

© 2010 UCLICK L.L.C.