reported its fourth straight drop in quarterly earnings Friday. But could its $9.5 billion takeover of British medical company
turn its fortunes around in the next two years?
"It's evident that GE sees that GE Medical will be the equivalent of GE Power in the 1990s, which was the main story of the '90s," said Jim Kelleher, an analyst at Argus Research. GE's power business generated up to one-third of overall earnings for the company in that decade, he noted.
But as the power unit's fortunes soured, the company has turned to its medical business and started marketing it aggressively, Kelleher said. Kelleher thinks GE's new business development approach -- acquisitions -- will help the company long-term.
"Business development has really been a hallmark of the
Chief Executive Jeffrey Immelt era," said Kelleher, who owns shares of the stock. Argus Research doesn't do investment banking.
While 2003 has been a year for acquisitions, "2004 had better be a good execution year, or the share price could get back down the mid- to low $20s," Kelleher said. The company must deliver on the
and Amersham deals, he said, but cannot forget about its smaller growth initiatives, such as water treatment and electricity.
Kelleher expects GE to be largely successful with Amersham, though, because he thinks the company has good momentum. "Assuming there is recovery in industrial economy, there is no company better positioned. It's not in GE's culture to fail."
Credit Suisse First Boston agreed that GE is aggressively transforming its portfolio by divesting low-growth and low-return businesses and investing in higher-growth and higher-return businesses such as Amersham. "Strategically, these are solid moves to improve the mix of GE's overall portfolio," the brokerage said.
To acquire Amersham, General Electric will exchange stock worth $9.5 billion for all of the U.K.-based diagnostics and life-sciences company, representing a roughly 45% premium over its Oct. 7 quote. GE will combine the company with its GE Medical unit, creating a $13 billion division to be headed by Amersham's Sir William Castell.
"The higher than expected purchasing price reflects the excellent match between the companies," said analyst Hans Peter Bohn of research firm Fondsfinans ASA. "We cannot see how other suitors could match this, hence do not expect competing offers." He noted that the companies do not have overlapping products.
General Electric expects the acquisition to be nondilutive to 2004 per-share earnings, although it will result in an in-process research and development charge. The deal is seen adding a penny a share to earnings in 2005.
Shares of General Electric were recently down 73 cents, or 2.4%, to $29.40, while Amersham shares were up $8.04, or 14.6%, at $63.11.
The Amersham acquisition will help General Electric come up with ways of improving the care of cancer patients via "personalized medicine," Immelt said on a conference call with analysts and investors. The merger will use two of Amersham's businesses -- health and bioscience -- to complement GE's existing general diagnosis and medical systems businesses.
GE brings molecular imaging to the merger, while Amersham brings therapy and diagnosis. The company expects to use functional molecular imaging equipment to see tumor shrinkage in patients more clearly than traditional anatomical imaging, such as CT scans, ultrasounds or X-rays.
"We can track how therapy is done in days vs. months," said Immelt. "We will help clinical customers to treat diseases earlier."
The overall goal, according to Immelt, is to "put together diagnosis imaging with theory and the right therapy to accelerate detection by an order of magnitude to increase survival rates."
GE needs something to pick up the slack from its power systems division, which has been hit by a postbubble evaporation of orders from utilities. The company reported Friday that third-quarter earnings slipped to $3.65 billion, or 36 cents a share, on revenue of $33.39 billion in the latest quarter, compared with earnings of $4.09 billion, or 41 cents a share, on revenue of $32.72 billion in the year-ago quarter. The latest period had a $372 million accounting charge, before which GE earned $4.02 billion, or 40 cents a share.
On a preaccounting charge basis, analysts surveyed by Thomson First Call were forecasting earnings of 40 cents a share on revenue of $32.43 billion.
Eight of the company's 13 businesses -- commercial finance, consumer finance, consumer products, insurance, medical systems, NBC, specialty materials and transportation -- had double-digit earnings growth in the period, year-over-year. The big drag on earnings was GE's huge power-systems division, which was hurt by a decline in sales of large gas turbines in the U.S.
GE said that with power systems and pension income backed out, per-share earnings would have risen 14% in the latest quarter over last year.
Top-line growth was fueled by a 13% rise in financial services revenue to $17 billion, partially offset by a 5% dip in industrial sales to $16.5 billion, reflecting the turbine softness.
The company said it now expects to earn 45 cents to 47 cents a share in the fourth quarter, compared with the consensus estimate is 47 cents. The company refined its full-year earnings estimate to $1.55 to $1.57 a share, from a previous guidance of $1.50 to $1.70 a share. Consensus is $1.57 a share.