Tuesday, October 06, 2009

Further Thoughts On GE's Disposal Of Its Media Businesses

Over the weekend I wrote this brief post on GE's overdue admission that it needs to begin unraveling the underperforming, diversified conglomerate.

Perhaps my most succinct piece on the pointlessness of GE's current incarnation was this May, 2007 post. In it, I noted,

"Simply put, corporate diversification for cash flow smoothing has been a discredited management approach for creating consistently superior total returns for some time. My own proprietary research, which drives my equity portfolio selection of consistently superior large-cap companies, confirms this. Back some thirty or forty years ago, when trading equities was expensive and information and innovation were in shorter supply, it may have made sense for investors to hold shares of conglomerates. And, in the day, they existed- Gulf&Western, ITT, and Litton, to name just a few. But they are gone now. ITT still exists, but in nothing like the shape it had under Harold Geneen.

Today's large firms are usually focused on a particular product/market. Diversified conglomerates are pretty much a thing of the past. Mediocre analysts and fund managers might confuse large focused global firms, such as Intel, Cisco, or ExxonMobil, with yesteryear's broadly diversified giants. You should not. I don't think investors do, either. That's why GE's stock is in suspended animation. Everyone can diversify more cheaply today than they can by paying an enormous tax on operating earnings of GE's business units in order to keep them under one administrative regime.

What's ironic is how everyone seems to have forgotten GE's heritage of being subjected to wrenching change with each new CEO of the prior forty years, except for Immelt. He's the only one not to have actually made a big change in the firm, and it has stalled."

I've had a couple of conversations with business colleagues about GE's newly-disclosed decision that it's time to unload the media businesses. While I am not, of course, privy to the board's or senior managements' private discussions, it seems to me that one or more of the following may be reasons why Immelt has suddenly come clean that GE needs a "greater fool" to buy NBC/Universal, and that fool is Brian Roberts.

First, according to the Wall Street Journal articles about the GE media unit, NBC's network operations are finally, inexorably sliding in profitability terms. While the company doesn't break out results in any more detail than the major business units, somewhere down in the depths of the NBC/Universal unit is, we are told, a declining network income statement. With each passing month/year, these properties become bigger drags on GE profit growth and total return.

Next is the Universal studio property. This morning's Journal announced that the studio co-heads are being shot and tossed out. Apparently, this unit, too, has been suffering from poor performance. Taking the network and movie studio together, I find myself recalling an Immelt remark about how much fun it was sitting in meetings to decide on production slates for both units.

Guess Jeff's touch isn't so good. And other executives will pay the price.

Then we come to NBC's cable properties. The ones with which we are well-acquainted, CNBC and MSNBC, are fairly small in the larger cable world. CNBC may be a the premier business cable channel, but it's woefully small next to general cable news networks like Fox or CNN.

However, the company also owns Oxygen, SyFy and USA Network, in addition to which it recently bought The Weather Channel. However, this collection of entertainment channels isn't going to carry the underperforming assets of the remainder of the entire NBC/Universal business group.

So, just in terms of the arithmetic of assets, revenues and profits, GE's media group is finally beyond a tipping point in its effect on GE's overall performance.

Beyond financial performance, there's the issue of the media unit's growing prominence as a lapdog for the current administration. There's been much written about NBC's and related properties' leftward political tilt. It could be that Immelt and his minions are beginning to realize that it's becoming riskier, given the actions of the current administration, to be seen as apologizing and cheerleading for it.

There is also growing awareness that GE stands to benefit financially from a government-run health care system and the crackdown on CO2 emissions and greenhouse gases. This bargain with the devil in Washington may be just a touch too cozy when the company also owns a collection of media properties which trumpet those government programs.

Simply put, it borders on GE churning out propaganda for the government, in return for favored treatment in various new programs. That makes the company a target for lots of criticism.

My next point is one that, ideally, would be a subject on my companion political blog. But I feel it's necessary to mention it here, and will do so as non-partisanly as possible.

If Immelt and his board feel that current legislative difficulties are likely to increase the chances that this will be a one-term administration, then the risks of betting everything on Washington's initiatives, and broadcasting them, too, literally, becomes higher.

If GE didn't own a media business, it would avoid and evade quite a bit of criticism for conflicts of interest. And, later, could duck a lot of flak for having been tailoring news and opinion to please Washington. Being seen as the media stooge for a failed administration might add unwanted pressure to the already long-underperforming conglomerate.

Then there's the embarrassment of GE's having to have taken government funding handouts to stabilize its over-leveraged, ailing finance unit. It was a pretty bitter pill to swallow for Immelt to have to rely on federal help to avoid a serious funding crisis of his own.

How can a company with the federal life support needle in its arm appear to run an objective, credible media group? It can't.

This, too, might now be seen as a real point of vulnerability moving forward. Thus, another reason to dump the media businesses ASAP.

Finally, there's the old adage, "strike while the iron is hot."

Just when the financials and, perhaps, political winds are beginning to blow ill for GE's media business, someone came along with an interest in relieving the company of this headache.

If GE can successfully get Brian Roberts to buy out Viviendi's interest in the media group, and then take it off GE's balance sheet, leaving the Connecticut-based conglomerate with a minority interest, it will have managed to unload a problem child before the value in it really craters.

One trend that is afflicting both GE's networks, and cable properties, as well as Roberts' cable business, is the move by many consumers to direct viewing of entertainment and other video content on the internet, rather than through intermediaries such as cable channels.

Roberts thinks he can scoop up enough content to be a key player in even internet-based content, just in case his distribution pipes really do begin to empty.

Whether this makes sense would be the subject of another post focused on Comcast. For right now, it's enough to note that Robert believes in this strategy.

There's nobody else on the horizon capable of taking NBC/Universal off GE's hands like this. TimeWarner is so messed up it couldn't possibly consider it. And, anyway, even Bewkes might be wary of having so many old network properties dumped on his balance sheet. TimeWarner seems to be moving out of content, at least on the print side. It's far from clear it would suddenly try to move into video content, but not in a gigantic way.

No, Brian Roberts is probably the last, best hope for GE, short of an outright spin-off of the media group. Which, by itself, is not a bad idea. And one I've advocated for over two years.

Having now broached the notion that it should jettison its media businesses, it may be hard for GE to avoid the spin-off route, if the Comcast talks fall through.

Of course, deep in the background of all this negotiating is the unspoken but implicit judgement that Jack Welch probably messed up in buying NBC to begin with. If it was such a great, strategic move, why is it being uncoupled now?

In fact, you could argue that the media group, as a standalone unit, might have been more nimble, savvy, and successful at doing what was necessary to enhance performance long ago. But, as part of the larger GE conglomerate, it was hamstrung by a corporate parent's oversight, bureaucracy, and funding.

But, now, there are a legion of reasons for GE to do something to shed the businesses. And no time like the present. Because, frankly, the present is still way too late for this move.

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