Friday, September 23, 2011

The Sensible Industrial Conglomerate: UT's Bid for Goodrich

I find the recent news that United Technologies is buying Goodrich to be yet another example of how much better-managed UT is than GE. And how UT chooses a large acquisition that serves common customers and/or provides additional products to complement existing lines at the company.

In contrast, GE's last really large purchase was RCA, years ago under Jack Welch. The firm got rid of most of RCA, but kept NBC. But, after decades of disappointing performance and management distractions, current CEO Immelt finally threw in the towel and undid Welch's deal.

The other quasi-sizable deal done by Welch, buying investment bank Kidder Peabody, also blew up from a trading desk scandal. It didn't fit with the rest of GE Capital, other than, well, they both involved finance.

To see how these different approaches to conglomeration are expressed as performance, the first chart is of the past five years of prices for UT, GE and the S&P500 Index.

UT has clearly outperformed the diversified conglomerate, GE.

Looking back further, to 1970, before UT's restructuring, the two were rather similar in performance for almost 20 years. By the mid-1990s, UT's performance, which has been fairly consistent for 40 years, became even more consistent. In contrast, GE experienced more explosive short term growth due to GE Capital and some apparently generous accounting treatment of several units, which came under closer scrutiny after Welch departed. GE's performance fell significantly right away under Immelt, Welch's successor, then really disintegrated in 2008 due to GE Capital's precarious financial condition.

Diversified conglomerates went out of style, for good economic reasons, before Welch left GE. But UT's brand of related conglomeration which focuses on specific customer groups, technologies and/or products, continues to perform consistently well, when well-implemented.

Goodrich looks like another piece which will fit well into UT's operations.

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