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(1) Read the attached Bloomberg Businessweek article about General Electric.(2) Complete the case study activity on Equity Valuations which requires the use of the Bloomberg terminal to complete an assignment. There are Weighted Average Cost of Capital (WACC) which requires the use of the Bloomberg terminal to investigate Disney’s WACC. There are 6 items required in this case. Items 1 – 5 will count 16 points each; Item 6 will count 20 points


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Bloomberg Businessweek
February 5, 2018
The astonishing mess
at an iconic American
By Drake Bennett
In the century following the Civil
War, a handful of technologies
revolutionized daily existence.
The lightbulb extended the day,
electric appliances eased domestic
drudgery, and power stations
made them all run. The jet engine
collapsed distance, as, in other
ways, did radio and television.
X-ray machines allowed doctors
to peer inside the body, vacuum
tubes became the brains of early
computers, and industrial plastics
found their way into everything. All
those technologies were either
invented or commercialized by
General Electric Co.
For most of its 126-year history,
GE has exemplified the fecundity
and might of corporate capitalism.
It manufactured consumer products
and industrial machinery, powered
commercial airliners and nuclear submarines, produced radar altimeters
and romantic comedies. It won Nobel
Prizes and helped win world wars. And
it did it all lucratively, rewarding investors through recessions, technological
disruption, and the late 20th century
collapse of American manufacturing.
That long, proud run may have
come to an end. It happened, as Ernest
Hemingway wrote of going bankrupt, “gradually and then suddenly.”
GE hasn’t inspired awe for some time
now: The company had to be bailed
out in 2008 by the federal government and Warren Buffett, and across
the 16-year tenure of recently departed
Chief Executive Officer Jeffrey Immelt
its stock was the worst performer in the
Dow Jones industrial average.
The past year, however, has seen
GE enter new territory. Since Donald
Trump’s election in November 2016,
during a stock market boom in which
the Dow is up 41 percent, GE has lost
46 percent of its value, or $120 billion.
A few months after Immelt retired as
chief executive last summer, the company shocked Wall Street by announcing earnings that were barely half of
analysts’ already lowered estimates.
Soon after, GE said it would halve
its once-­s acrosanct stock dividend
because it was short on cash. It also
said it would sell or spin off $20 billion in businesses, including its lightbulb division. (The appliance business
was sold to the Chinese manufacturer
Haier Group in 2016, along with a
license to use the GE brand.)
Then in January came news of a
$6.2 billion charge related to costs
incurred more than a decade ago by
GE’s financial-services business, an
announcement that triggered a U.S.
Securities and Exchange Commission
investigation. GE’s new CEO, John
Flannery, has grimly promised that “all
options are on the table,” including the
once-unthinkable option of dismembering the company entirely.
February 5, 2018
And yet, little of this has to do with
the stuff GE makes. Its jet engines still
dominate the global market. Its turbines, whether in gas, coal, or nuclear
power plants, still provide a third of the
world’s electricity. Its CT scanners and
MRI machines are still the state of the
art. So what happened?
Unlike General Motors Co., Boeing Co.,
and other American manufacturing
icons, GE isn’t associated in the public imagination with just one industry or one product, but rather with
industrial innovation itself. Famously
co-founded by Thomas Edison, GE was
actually run in its early years by another
co-founder, Charles Coffin. The former
shoemaker saved the young company
from insolvency by negotiating with J.P.
Morgan, untangled key patent rights
with Westinghouse, and established
the industrial research laboratory that
would bring so many good things to life.
Since Coffin, GE’s secret weapon—
and in a way its dominant product—
has been its managers. The company
brought organizational rigor to the
process of scientific discovery, and
scientific rigor to management. In the
postwar years, GE hired psychologists
for a personnel research department.
It also bought an estate on the Hudson
River an hour north of New York City
and turned it into the world’s most
­famous management training center.
Crotonville, as it came to be known,
was a place where current and future
leaders would retreat to be taught,
tested, and imbued with the company’s values. GE’s courtly CEO and chairman in the 1970s, Reginald Jones, was
the most ­admired business executive of
his era, pushing into international markets and serving as an adviser to four
U.S. presidents.
Jones’s successor was a chemical
engineer named John Welch Jr. who’d
risen through the ranks of GE’s plastics
division. You may know him as Jack.
Under Welch, GE came to be seen as a
factory for elite corporate talent. The
new boss placed a premium on leadership development and the ruthless culling of underperforming employees. He
became the highest-profile evangelist
Bloomberg Businessweek
Bloomberg Businessweek
A dial-studded GE computer used
to model a complex electric power
system, Columbus, Ohio, 1955
for Six Sigma, a management philosophy based on the systematic pursuit of
otherworldly flawlessness. Promising
young executives were moved between
distant poles of the GE empire—from
medical devices to locomotives to NBC
(GE bought the television network in
1986)—so they could inject fresh ideas
and test themselves. Armed with Six
Sigma, inspired by Jack, honed by the
breakout sessions at Crotonville, GE’s
organizational officer corps could run
anything, the thinking went.
The company’s mandarin confidence was reflected in the tradition of
allowing chief executives tenures that
measured in the decades, so they could
lift their eyes from the daily fever line of
the stock market to more distant horizons. Over time, Welch’s management
teachings became a best-selling literary
subgenre. Fortune magazine named him
manager of the century, and other business periodicals were no less fulsome
in their praise (this one gave him a regular column). Such was the premium
placed on GE managerial talent that
when Immelt, with papal pomp, was
unveiled as Welch’s successor, the other
two longtime GE executives who’d been
finalists for the job were quickly hired as
CEOs by 3M Co. and Home Depot Inc.
GE became the great counterexample
to a growing skepticism among investors and economists about giant diversified companies. During the 1980s, as
conglomerates were increasingly written off as lumbering and opaque, GE
was lauded as what researchers at the
Boston Consulting Group called a “premium conglomerate”—focused despite
its diversity, nimble despite its scale,
February 5, 2018
and armored against cyclical downturns in individual industries. And if GE
also became known for eschewing generally accepted accounting principles
in favor of more exotic and less informative measures, investors and analysts could at least take comfort that the
company was in capable hands.
Under Welch, GE’s net income
swelled from $1.65 billion in 1981 to
$12.7 billion in 2000, even as its workforce shrank from 404,000 to 313,000.
But over time, less and less of that
income came from technological innovations or manufacturing prowess or
even the productivity gains Welch had
wrung out early in his tenure. Instead
it came from GE’s financial-services
arm. From its humble beginnings
financing family purchases of refrigerators and dishwashers during the Great
Depression, GE Capital had ballooned
into a behemoth whose global stable of
investments ran from insurance to aircraft leasing to mortgages, giving GE
a share of the action during a period
when the financial sector was the
fastest-­growing part of a ­fast-­growing
U.S. economy.
In the hands of GE’s financial executives and tax lawyers, earnings from
this division had special powers.
General Decline
GE has been the worst-performing stock in the Dow Jones
industrial average for more than a year
12/30/16 1/30/18
GE Capital could borrow money in
the U.S. to fund offshore businesses in
countries where corporate taxes were
much lower (or nonexistent), then turn
around and use the interest charges on
those loans to offset the income from
GE’s onshore manufacturing businesses, making its U.S. tax bills disappear. And unlike a factory, GE Capital’s
highly liquid assets could be bought or
sold at the ends of quarters to ensure
the smoothly rising earnings that investors loved. The term accountants use
for earnings from these sorts of one-off
asset sales is “low-quality,” but through
the historic bull market during which
Welch had the good fortune to run the
company, investors tended not to get
hung up on questions of quality. GE’s
market capitalization grew from $14 billion in 1981 to more than $400 billion
when Welch retired in 2001.
The risks became clear only under
Immelt, who took over the company
in the wake of the dot-com bubble and
right before the attacks of Sept. 11 (a
particularly acute shock to a company
GE Power’s Schenectady, N.Y.,
headquarters in the 1980s
February 5, 2018
The SEC’s Beef With GE
Murky accounting has gotten the company in trouble before
General Electric has long
had a reputation for, shall
we say, creative accounting.
That wasn’t a problem
when the company was
consistently topping investor
expectations. These days, it’s
more of an issue.
After a year of problems,
from cash-flow shortfalls
to the announcement of a
$6.2 billion charge related to
some long-term insurance
holdings, the U.S. Securities
and Exchange Commission
opened an investigation
into GE’s accounting
practices. The regulator is
interested in GE Capital’s
insurance portfolio and in
service agreements on GE
equipment, particularly in its
power business.
Here, GE’s accounting
practices appear to be
pretty standard: As many
others do, the company
bases its revenue projections
on a number of variables
such as the future expense
of maintaining equipment
and whether it thinks
customers will be able
to pay. But the mismatch
between GE’s booked
sales and total cash expected
that did billions of dollars in business with airlines). As the years went
on and GE’s stock price fell to a third
of its Welch-era peak, Immelt came
under pressure from Wall Street
to do something. He embarked on
a series of splashy acquisitions,
for example paying $5.5 billion for
is extraordinarily large:
$28.9 billion in 2017, filings
show, after roughly tripling
from 2010 to 2016. About
half that is from the service
Chief Financial Officer
Jamie Miller said on a
conference call with analysts
that she’s been reviewing
the books and isn’t “overly
concerned” about the issues
being investigated. This isn’t
GE’s first time on the wrong
side of the SEC, though.
Back in 2009, the agency
accused GE of breaking rules
to increase profit or avoid
reporting losses. GE didn’t
admit or deny wrongdoing,
but it did agree to pay
$50 million to settle the
claims. �Richard Clough
the entertainment assets of Vivendi
Universal and $9.5 billion for the
British medical imaging company
Amersham. There were bargains such
as Enron Corp.’s wind-turbine business, picked up in a bankruptcy auction, but for the most part the deals
proved more expensive and less
Bloomberg Businessweek
Bloomberg Businessweek

synergistic than promised. Scott Davis,
a longtime GE analyst and the CEO of
Melius Research LLC, has calculated
that GE’s total return on Immelt’s
acquisitions has been half what the
company would have earned by simply
investing in stock index mutual funds.
Immelt also publicly pledged to
return GE to its industrial roots (with a
new concern for environmental impact)
and reversed the deep cuts Welch had
made to research and development.
Still, under Immelt GE Capital only
grew. Its profits quadrupled as it gobbled up credit card companies, subprime lenders, and commercial real
estate. These weren’t businesses GE
had much experience in, but the company had long taught its young executives that they could manage anything.
The 2008 financial crisis revealed
this not to be the case. In the first
quarter of that year, a month after
Big Dreams,
Small Returns
$2.7b, 2001
Hope: One of the first
deals of the Immelt era,
it was designed to give
GE’s entertainment division (which at the time
included NBC, and later
Universal Pictures)
a foothold in the
fast-growing Spanishlanguage market.
Reality: Almost immedi­
ately, analysts criticized
the purchase as an
overpay. Within a year,
Telemundo’s share of
the Spanish-language
prime-time audience
had fallen to 16 percent
from 22 percent. GE
got out of the entertainment business entirely
a ­little more than a
decade later.
A problem in
one business
is exactly what a
should be able
to shrug off
Immelt had reassured investors
that all was well, GE’s profits fell
short of analyst expectations by a
then-­unprecedented $700 million.
“It seems like something’s broken
here,” Davis, then a Morgan Stanley
analyst, said on GE’s quarterly earnings call. The company, it turned
out, had been relying heavily on
short-term debt to ensure those rising earnings, and when that market
froze, GE lost its magical tool. Within
months there were worries that the
company wouldn’t be able to pay
its debts, then worries that it might
February 5, 2018
collapse entirely. In October, GE had
to raise $15 billion through an emergency stock sale, $3 billion of it from
Buffett’s Berkshire Hathaway Inc. GE
only survived the year intact thanks
to $139 billion in loan guarantees from
the federal government.
In the decade after that harrowing
experience, GE Capital was severely
downsized. But elsewhere, Immelt
kept on acquiring, spending $10 billion for the power business of French
company Alstom, for instance. He also
poured money into GE Digital, an ambitious effort aimed at perfecting a software language to handle the torrents
of information created and captured
by next-­generation industrial machines.
Immelt talked about making GE a “top
10 software company” whose code even
its competitors would have no choice
but to use.
These efforts failed to forestall the
next round of troubles—and in the case
of Alstom, they helped precipitate it.
With that deal, GE had made a massive investment in natural gas power
GE’s acquisitions under Immelt performed
poorly, to say the least
$9.5b, 2003
$1.4b, 2004
$10b, 2014
Hope: The diagnostic
pharmaceuticals company would put GE
in position to lead “a
new chapter in medicine,” in the words of
Amersham CEO Sir
William Castell.
Hope: Expanding its
building-­security systems business would
position the conglomerate to gain from population growth and a
societal focus on safety
in the U.S.
Hope: GE would be
established as the
undisputed global
leader in power generation from natural gas.
Reality: Investors
have complained ever
since—in interviews,
research reports,
and among themselves—that GE spent
too much on the
deal. They argue that
since Amersham had
­little-to-no overlap with
GE’s other industrial
businesses, there was
little-to-no reason to
hang on to it.
$500m, 2004
Hope: In a booming
housing market, subprime mortgages are
a guaranteed money-­
maker, right?
Reality: You can guess
how that went. GE got
out after just three
years—in the middle of
the mortgage crisis—
but the fallout endures.
As of September 2017
the company was still
facing multiple related
Reality: It did not. GE
sold its entire security
division five years later
for just $1.8 billion.
$14b, 2007–14
Hope: A series of rapid-­
fire acquisitions—
Vetco Gray, Dresser,
and Lufkin Industries—
was supposed to help
GE grow quickly in a
hot market.
Reality: From 2014 to
2017, with the collapse
in oil prices, profit in
GE’s oil unit plummeted
92 percent. GE merged
the business with Baker
Hughes and is now
­considering ­getting out
of the industry.
Reality: The low-margin
operation bloated GE’s
power unit just as the
global gas-power market slumped. Profit in
the division fell 45 percent last year; GE
Power is now in the
process of shedding
12,000 employees.
�Richard Clough
The Giants of GE
The men who’ve made the company what it is—
for better or worse
GE’s first president talked his way out of
corporate bankruptcy during the Panic of
1893. Without him, there would be no GE.
He started in the company’s Business
Training Course in 1939 and never left,
taking GE global along the way.
His favorite saying was “Fix it,
close it, or sell it”—basically the
20th century equivalent of
“Move fast and break things.”
He had a tough act to follow, not least
because he took over at the beginning
of a series of bear markets.
The Man Who Could Break Up GE
has spent his first six months working
to streamline the aging behemoth.
February 5, 2018
plants just as the market for them
was contracting. Part of the decline
was due to the falling cost of renewable energy, a competitor to natural
gas, part to a drop in oil and gas prices,
which hurt demand from the petrostates that are some of GE Power’s
biggest customers. GE was left with a
bunch of turbines on its hands. It was
a costly mistake: The combination of
higher inventory and lower earnings
reduced the company’s cash flow by
$3 billion. This past August, with the
stock price burrowing ever downward, Immelt stepped down as chief
executive, saying he would stay on as
chairman until the end of the year. By
October, though, he’d stepped down
from that post, too.
GE wasn’t the only company to
miss the slowdown in the gas-­turbine
market—so did competitors such as
Siemens AG and Mitsubishi Heavy
Industries Ltd. But a problem in one
business is exactly the sort of thing
that a premium global conglomerate
should be able to shrug off. Instead,
just as in 2008, the opposite is happening, with robust GE businesses being
dragged down by stressed ones. And
now as then, investors and analysts
who’d been reassured by GE executives that things were fine have found
themselves blindsided. GE’s decision
to cut its dividend wouldn’t have been
so surprising if it hadn’t spent $49 billion on stock buybacks over the previous three years—something companies
typically do when they’re flush with
cash and looking to return some of it
to shareholders.
The dividend cut also brought
renewed attention to GE’s $31 billion pension shortfall, which dwarfs
that of any other U.S. corporation.
GE’s January announcement that it
was setting aside billions of dollars
for payouts on long-term care policies from an insurer it shed years
ago only added to the uncertainty.
“It makes you wonder what’s next,”
says Nicholas Heymann, an analyst at
William Blair & Co. and a former corporate auditor at GE.
What’s additionally baffling about
GE’s difficulties is that there’s no
Bloomberg Businessweek
Bloomberg Businessweek
February 5, 2018
Aviation Is Still
Flying High
Jet engines would likely be the last
business to go
Change in GE’s
2017 profit
Change in GE
Aviation’s 2017 profit
Aviation’s share of
GE’s positive operating
GE Aviation technicians work
on an M601 turboprop aircraft
engine in Prague in 2016
surrounding global financial crisis, no
chorus of sober-minded people fearing for the future of capitalism itself.
Rather, the company is flailing while
the world’s major economies are all
robustly growing. It’s the exact sort of
m …
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