GE-RCA merger strikes sparks. Analysts see bright new prospects for electrical giants
The biggest non-oil merger in American corporate history raises two basic questions: Why is General Electric buying RCA now? and what will be gained by the acquisition? The $6.28 billion deal will push General Electric, the 11th-largest company in the United States, to the No. 7 spot. In the process, it will give the giant consumer products manufacturer and defense contractor the top-rated (prime time) but least profitable television network, National Broadcasting Company.
The acquisition will also further transform GE into a growth company.
``John Welch [GE's chairman] has said he doesn't want to be responsible for running a mature business,'' says William H. Newman, chairman of the Strategy Research Center at Columbia Business School. ``He's got the guys at GE really stirred up,'' adding that some spinoffs of low-growth areas in both GE and RCA could be coming down the pike, though probably not in the near future.
Mr. Newman points out that after GE sold Utah International, its natural resource unit, for $3.3 billion last year, it was left with about $5 billion in cash.
``Welch had this enormous war chest and didn't know what to do with it, and the rate at which GE could generate internal expansion was limited,'' he says. GE made an offer to buy CBS and reportedly went after Hughes Aircraft Company, which was bought by General Motors for $5 billion.
Analysts are generally positive about the GE-RCA deal. Mark Altman at PaineWebber says the $6.28 billion price tag is ``reasonable.'' He sees some synergy, or the possibility of reducing costs in similar businesses, especially in distributing various consumer electronics products.
Both RCA and GE are into consumer electronics, defense, broadcasting, and satellite communications. Mr. Altman says the two companies ``could have some trouble [with antitrust laws] because of overlap in consumer electronics and defense contracting.'' The Reagan administration has generally been more lenient than its predecessors in prosecuting antitrust cases.
Robert McCoy at Kidder, Peabody says GE is getting a very good deal. ``Jack Welch is a very smart fellow. He sees the value here, and he can run with RCA.''
Under the stewardship of Thornton F. Bradshaw, RCA has become more focused and profitable. In the last four years, profits have risen by 60 percent a year, from $54 million in 1981 to a projected $350 million this year.
RCA's strong position calls into question what more GE can do for the company. ``GE doesn't have much to contribute now,'' says Dr. Newman. ``The major surgery has already been done.''
Since he took the reins, Mr. Bradshaw has redirected RCA toward its traditional electronics technologies and entertainment services (broadcasting and music recording). Last year it sold its money-losing videodisc player business, sold CIT Financial Corporation, and earlier this year sold its Hertz rental car business.
Most analysts think GE chairman Welch will let RCA alone, especially where the broadcasting business is concerned. ``I don't know what talent that GE has that will make a marked improvement'' in the way NBC is run, says Newman.
Altman at PaineWebber agrees. ``NBC has strong momentum and GE will let it run the way it's been running,'' he says.
Others, however, say there may be some margin to increase the TV network's financial performance, parlaying hits like ``The Cosby Show,'' ``Cheers,'' ``Hill Street Blues,'' and ``Miami Vice'' into profits.
In the last year, all three networks have come under great pressure to improve the bottom line. For instance, Capital Cities Communications, which acquired ABC for $3.5 billion earlier this year, is known for running a tight ship and cutting costs.
CBS fended off a hostile takeover attempt by Ted Turner by buying back $954 million of its stock. It has cut out some jobs and pledged to reduce expenses by $20 million.
The timing of the GE-RCA deal appears unrelated to any tangible legislative action to stem mergers. The Federal Reserve Board last week recommended measures that would curb hostile takeovers financed by ``junk bonds.''
But GE is a triple-A-rated company and would not need to resort to that kind of financing, points out Mr. McCoy at Kidder, Peabody.
A New York State law that was passed Tuesday and is awaiting Gov. Mario Cuomo's signature would delay any hostile takeover for five years. But the law would protect companies that are both incorporated and headquartered in the state; this deal is not hostile, and even if it were, RCA is incorporated in Delaware.
The timing, says Newman, has more to do with ``the environment'' of takeover activities. ``The threat of increasing regulation, as in New York, could have been a little spur to Welch to get it done,'' he says.
He notes that the Federal Reserve's action and the New York bill, as well as court proceedings like Pennzoil's record $11.1 billion award from Texaco after Texaco bought Getty, belie a ``general feeling in the public,'' and perhaps soon in Congress, that the merger mania may have gone far enough.