General Electric Case Study

General Electric Case

Team 6

Annie Jeon, Danny Fowler, Jill Nobles, Kushagra Kohli, & Tyler Patrick

Finance 525: Professor Jill Grennan

1/30/18

Executive Summary

In March 2009, General Electric (GE) had escaped financial crisis, but at a cost.  As GE’s technology and infrastructure was doing well, its Media and Consumer Industrial divisions did not compete well in their respective fields. GE’s CEO at the time, Jeff Immelt, was faced with a difficult decision: was he to keep GE a conglomerate or dissemble its units to reach full potential?  

To aid in Mr. Immelt’s decision, we performed comparability analyses to benchmark GE’s position to their main sector competitors. A list of companies that compete as conglomerates, energy infrastructure, technology infrastructure, consumer industrial, and media industries helped us frame GE’s position as a conglomerate as well as each of GE’s individual business units within its respective industry. We compared GE to the other comparable conglomerates using P/E ratios, EV/EBITDA, EV/Sales, and the EBITDA Margins.  We found that GE has an average P/E ratio in comparison to these other conglomerates.  However, GE has a much higher EV/EBITDA, EV/Sales, and EBITDA Margin than the average of other comparable conglomerates.  GE is successful when benchmarked to these competitors.

After a deep analysis of both GE as a conglomerate and as a sum separate business units, our findings were that GE as a conglomerate is worth much more than it would be as the sum of its individual businesses operating independently.  Using the multiples calculated above we were able to determine the worth of GE’s individual business units in comparison to their competitors within their industries.

We then calculated the value of the individual components of each business under GE.  We found that GE’s value is greater than the sum of its parts.  We calculated a share value of $9.49 for GE as a conglomerate and $9.39 share value for the company as a sum of all of its parts.

Case Analysis

General Electric avoided the major fall out of the recession, although there was repercussions in particular segments.  GE’s technology and infrastructure was booming, but on the other hand, it’s Media and Consumer Industrial divisions could not contest. Thus, the company was facing a difficult decision: could the company keep GE as a complete conglomerate or remove parts to reach full potential?  

For our calculations we considered a good comparable company to GE to be similarly sized and have similar risk, growth and cash flows. Looking at the given information on Exhibit 1 we can rule out the comparables with highly differing Betas. Hence we decided that it would be good to remove Technology Infrastructure companies with NM (Negative Multiple) Betas, which is far of from GE’s Beta of 1.27.

GE would be worth more “Alive” as a conglomerate as reflected by the conglomerate share price of $9.49 vs the sum of parts share price of $9.39 (Exhibit 5). This leads us to believe that some sectors of GE are not as profitable as others and may be dragging the sum of parts value down for the other sectors. Hence divesting a sector with a low sector share price would raise the sum of parts value in theory. However, we believe that undervaluation and the overvaluation of the different divisions pool together into creating the value of the conglomerate and hence the conglomerate value is reflective of each division and divesting one division may not necessarily raise the value of the conglomerate.