Does Ge Have Kemper Cornered?Tim Smart
Since taking the reins of General Electric Co. in 1981, CEO John F. Welch Jr. has been a grand acquisitor. In the mid-1980s, his quarry included RCA Corp. More recently, Welch has spent billions to buy assets in Europe and Asia and depressed real estate from banks and thrifts. Usually the deals are signed, sealed, and delivered before Wall Street ever gets wind of them.
But on Mar. 14, GE took a different tack. The company went public with its $2.2 billion cash offer for Kemper Corp., the big financial-services concern based in Long Grove, Ill. After Kemper CEO David B. Mathis rebuffed the proposal, Welch and GE Capital Services CEO Gary C. Wendt turned up the heat with a direct appeal to Kemper's board and a signal that GE might boost its $55-a-share bid. "It's a bear hug," says NatWest Securities analyst Nicholas P. Heymann.
A VERY GOOD FIT. Why pour a big chunk of dough into expanding GE Capital when the boom in financial services may have already run its course? Whatever happens in the short term, Wendt believes demographics--the aging of baby boomers--will make financial services a growth business over the long haul. He may not be the only one out there shopping around, either. His bid sparked a runup in the stocks of fund-management companies such as T. Rowe Price Associates Inc. and Oppenheimer Capital LP.
Adding Kemper's $70 billion in money-management assets to the $75 billion that GE now manages would fit neatly into GE's strategy. And it's cheaper to buy into the business than to start from scratch. Moreover, the capital unit is GE's hottest performer. Wendt's mix of two dozen businesses is growing at 20%-plus a year, and GE Capital now contributes more than a third of GE's profits (chart).
The strategic fit also is good. GE Capital does everything from processing Exxon credit cards to financing power plants in Asia. The strength of Wendt's operation is wringing out overhead and managing assets better than those who had them before. That would be the goal with Kemper, which has been a subpar performer. In fact, concern over Kemper's battered real estate portfolio has left it with a Baa2 rating. GE's AAA credit rating likely would lower Kemper's capital costs.
A purchase of Kemper wouldn't be GE Capital's first move into the business of selling investment products to aging boomers. Last year, it paid $525 million to buy GNA Corp., a provider of annuities, from Weyerhaeuser Co. Later, it bought United Pacific Life Insurance Co., another annuity company, for $550 million.
In Long Grove, perhaps predictably, GE's strike was greeted icily. It didn't take long for Mathis' initial polite rebuff to Welch to turn into outright hostility. A day after GE made the correspondence public, Kemper branded Welch's offer a "shocking assault."
NO MATTER. The message: Go away. Kemper had just emerged from a major restructuring in which it shed its property/casualty and reinsurance businesses, once core operations. Employment fell by a third, and the company wrote down its $1.3 billion portfolio of troubled real estate to just 42 cents on the dollar. "We cleaned out our portfolio enormously," Kemper President Stephen B. Timbers said in an interview before the GE move. That helped Kemper post a $235 million profit last year after a $203 million loss in 1992.
That performance may not count for much now. Kemper's board has supported Mathis throughout his reorganization. But with 70% of the company's stock now in the hands of institutional outsiders--among them hedge-fund operator George Soros and the Franklin fund group--it may be hard to fend off GE. Another bid could emerge, but the GE camp exudes confidence. "There aren't a whole lot of people out there willing to go head to head with GE," says a source close to the company. Analysts expect that GE's final offer will approach $70--a price that investors likely will accept. "They're going to go with the guy with the bucks now rather than work for the future," predicts Dean Witter Reynolds analyst Michael A. Lewis.
As for Welch, he likely will remain on the acquisition trail. GE had $3.2 billion in cash sitting around at the end of last year, and Wall Street has been waiting anxiously for him to spend it. The 1993 sale of GE's aerospace business to Martin Marietta Corp. helped reduce the company's yearend debt ratio to less than 16%. Now that Kemper is in GE's bear-hug, it isn't likely to escape. And a foraging bear rarely stays sated for long.
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