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GE heralds the death of the industrial conglomerate

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Barbarians inside the gate

In the span of less than a week comes the unwinding of two hallmarks of the American corporate conglomerate.

On Tuesday General Electric announced plans to break itself into three separate companies, focused on healthcare, aviation, and energy. The move comes just days after IBM shed a quarter of its business, spinning off the services business that saved “Big Blue” from bankruptcy in the 1990s.

There are no corporate raiders overtly banging on the gates of GE’s new headquarters in Boston, or at IBM’s tree-lined abode in Armonk, NY. Instead, both conglomerates are being put through a high-powered corporate compressor by their own management after being felled by financial gravity.

An employee assembles a jet engine at a General Electric plant

As empires, IBM and GE were supposedly diversified, with far-flung operations immune to macroeconomic shocks in any one region, and stables of workhorse businesses that could pick up the slack for a few laggards.

Instead, they proved to be immune to capturing any of the gains of a decade-long stock market boom. Over the past decade GE failed to return 2 per cent annually, while markets soared at an over 16 per cent annual average.

GE’s break-up move manoeuvred by chief executive Larry Culp continues the unwinding of what briefly was the world’s largest company, a former triple A-rated giant built by Jack Welch at the end of the last century. When the 2008 financial crisis struck, Welch’s successor Jeff Immelt relied on $130bn in bailout funds to survive.

GE chiefs past and present Jack Welch, left, Jeff Immelt, John Flannery and Larry Culp

The blame for GE’s descent rests on ill-advised dealmaking and a black hole of financial risks it took on when its credit was on par with the US government. Using its pristine balance sheet, GE lost billions in everything from subprime mortgages to offering long-term care insurance to the elderly.

During Immelt’s near two-decade tenure, GE sold valuable assets such as NBCUniversal to Comcast for a pittance, and bet erroneously on energy and industrial assets, in costly mistakes that incinerated shareholder capital. During this time GE also made hundreds of acquisitions that came at a cost of more than $150bn and sold off an even greater number of assets.

The wheeling and dealing did nothing but torture investors, even trapping the likes of Trian Fund Management’s Nelson Peltz and Berkshire Hathaway’s Warren Buffett into bad trades.

Nelson Peltz, the billionaire founder of Trian

On his first week on the job in October 2018, Culp laid out a $23bn writedown, the majority of which was related to the acquisition of the French energy giant Alstom and a cash crunch in GE’s power division. He has been trying to cut debt ever since.

As the FT’s Lex column writes, the most effective move by Culp, an outsider with few loyalties to preserving GE’s legacy, was to sever the company from its past.

Salvation for GE shareholders — if there is any — may come from the new A-rated corporate behemoths of a leaner era in financial management, which prioritise efficient businesses run with a single strategy.

With almost $500bn to deploy, private equity giants such as Apollo, Blackstone, KKR and Brookfield can only salivate at Culp’s break-up plan, as businesses spanning power, renewable energy and even aviation are put into play.

The private jet problem for private equity

Private equity firms often insist they can make money for their investors, whatever the weather in financial markets. Whether foul or fair, investors can certainly count on paying hefty bills for the firms’ expenses and fees.

The pension funds and other asset allocators that provide capital to this $4.5tn investment industry rarely criticise private equity managers in public. Still, there are murmurs of discontent about fee structures and expenses rules that some investors view as opaque.

Some investors told the FT’s Chris Flood that they often find themselves billed for extra costs, including the chartering of private jets, in addition to the standard “two and 20” management fee structure in which managers charge a 2 per cent annual fee and a 20 per cent performance fee.

Private capital industry has exploded in size

Those voices could yet be the start of a movement. While asset allocators are often reluctant to speak out, for fear of being frozen out of the best funds or co-investment deals, regulators face no such constraints — and they are beginning to pay attention.

The Institutional Limited Partners Association, a trade body, is lobbying US regulators to force private equity managers to disclose fees and expenses to investors.

US Securities and Exchange Commission chair Gary Gensler

So far enforcement action has been limited. But Gary Gensler, chair of the US Securities and Exchange Commission, has also come out in support of reforms to enhance fee disclosures by private funds.

The luxury tycoon that won’t be rushed by activists

Investors tuning in to Richemont’s half-year earnings presentation on Friday will be eager to ask one question of chair Johann Rupert: what’s going on with Third Point?

The much-feared activist hedge fund run by the billionaire Dan Loeb has bought shares in Richemont, people familiar with the matter told the FT’s Leila Abboud, although it’s not known how large a stake the firm holds, nor what it intends to do at the company.

Richemont and Third Point are not commenting publicly.

But one thing’s sure: Rupert, the 71-year-old South African businessman who built Richemont up into a bling powerhouse behind the megabrands Cartier and Van Cleef & Arpels, will be in the driver’s seat. The chair owns 9 per cent of Richemont’s capital but controls more than half its voting rights because of a dual-class share structure.

Johann Rupert, founder and chairman of Richemont

That means that even an activist investor as savvy as Loeb, who recently went public with an aggressive campaign to push for a break-up of the oil major Royal Dutch Shell, can’t intimidate Rupert.

If Richemont is going to address longstanding issues that analysts have pointed out, such as losses at its ecommerce unit Yoox Net-a-Porter or weakness in fashion and apparel, then it’ll do so on Rupert’s say so.

In a sector dominated by family-owned groups, luxury has never been known for its top-notch governance, nor its transparency in terms of business metrics. But investors have long tolerated it because the sector has been in a two-decade tear largely driven by the affluent in China becoming big consumers of Hermès and Louis Vuitton.

Lex: Until this year, Richemont shares have trailed those of its peers

Richemont has enjoyed the run just as its rivals LVMH, Hermès and Kering have done, but has generated comparatively less shareholder value along the way.

Some of that’s down to the innate differences in their business mixes, with Richemont more reliant on slower-growing watches and jewellery than on leather goods, in particular Cartier.

If and how he decides to compromise with shareholders, Rupert will be in no rush, as Lex points out.

Even in the world of luxury goods, where dual-class structures are often afforded to the industry’s most powerful dynasties, Rupert’s supervoting shares are something to behold.

Job moves

Paul Compton

  • Barclays is set to name Paul Compton sole head of the investment bank, the first move by the new chief executive CS Venkatakrishnan to stabilise the UK lender since taking over from Jes Staley this month.

  • Liam Condon is departing as president of Bayer’s crop science division, which includes the US agrochemical group Monsanto, the subject of an ill-fated takeover by the German drugmaker in 2018. He will be succeeded by the company’s chief operating officer Rodrigo Santos in January.

  • KKR has appointed KV Kamath as a senior adviser to KKR India, based in Mumbai. He most recently served as the first president of the New Development Bank and currently chairs India’s newly established National Bank for Financing Infrastructure and Development.

Smart reads 

Winning streak Chinese executives of US-listed companies have a history of well-timed share sales, an FT investigation finds, in some cases cashing out holdings just ahead of major market-moving events. (FT)

Fifth time’s the charm Sue Y Nabi, Coty’s fifth chief executive since 2015, is betting on luxury cosmetics to reverse the debt-laden cosmetics maker’s fortunes. Its deal-hungry controlling shareholder JAB hangs in the balance. (FT)

Repo Redditors The latest day-trader craze isn’t another meme stock, but the Federal Reserve’s reverse repo facility, used by novice investors to try and predict an impending market crash. The only problem: many have no idea what they’re doing. (Bloomberg)

News round-up

DoorDash buys Finnish delivery app Wolt in €7bn all-stock deal (FT)

JAB’s casual dining group Panera set to return to public market (FT)

Axel Springer plans to force disclosure of employee relationships after Bild scandal (FT)

Activist fund tries to scupper Goldman Sachs, Nippo and Eneos deal (FT)

Morgan Stanley gives rich customers what they want: hot start-ups (Wall Street Journal)

Hedge fund Millennium returns billions to clients in shift to long-term assets (FT)

HSBC exceeds China wealth hiring targets, explores India private banking re-entry (Reuters)

Element Capital hit with $1bn loss in bond market shake-up (FT)

BlackRock, Brookfield are among bidders for Aramco gas pipelines (Bloomberg)

Takeover contest puts the spotlight on Singapore (FT Opinion)

Chamath joins the Metromile low club (Alphaville)

MPS/UniCredit: between a rock and a hard bargainer (Lex)

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