Commentary: GE Can't Waste Time Mourning Honeywell

By Pamela L. Moore

From the look of things, Jack Welch's risky last act at GE (GE ), meant to cap his 20-year career as CEO, is being yanked offstage. Europe's antitrust regulators seem set against General Electric Co.'s proposed $45 billion purchase of aerospace giant Honeywell International Inc. But would that really be bad news for Welch successor and GE Chairman-elect Jeffrey R. Immelt?

Despite all the drama accompanying the deal's last gasps, its demise isn't without some benefit. Honeywell's (HON ) own marriage to AlliedSignal never came together successfully: Orders have dropped, profits have fallen steadily, and the company has desperately tried to prop up performance by slashing jobs. Integrating the troubled company with GE's operations was likely to have been a long, tough slog--making Immelt's task of stepping into Welch's shoes even harder.

Still, Immelt is hardly home free. He faces a major problem: keeping up the phenomenal growth record GE set under Welch. Several of its businesses are peaking or showing signs of a slowdown. "They need to do a deal," says investor George Tall, portfolio manager at Boston's David L. Babson & Co., who sold the last of his GE shares in March. "Their top line and operating profits in the majority of businesses, excluding GE Capital and GE Power Systems, are looking kind of unhealthy."

DEMANDING INVESTORS. That will leave Immelt with plenty on his plate once Welch retires, as is now expected within months. Investors assume he will continue GE's nearly untarnished record of posting 15% earnings growth each quarter, an increasingly difficult task. True, medical-systems profits have been strong; they now account for 8% of GE's profits. But other economically sensitive divisions are suffering. Computer makers are cutting orders from the plastics division. As GE has cut prices, profits from dishwashers and other appliances have fallen. And NBC has been hit by weak advertising. Those three units, which, according to Merrill Lynch, will account for roughly 15% of GE's estimated revenues of $134 billion this year, will bring in one-fifth of GE's operating profits of $22 billion. That's down from one-quarter of 2000's profits.

One of the only things supporting GE's profit growth is the phenomenal run of its power-systems division, which builds the turbines at the core of electrical plants. Because of booming demand for new utility plants, the unit now accounts for 14% of sales and one-third of earnings.

Question is, how long can the power business keep it up? Sure, profits more than doubled, to $951 million, in the first quarter. But power-plant construction is notoriously cyclical. According to Boulder (Colo.)'s RDI Consulting, a boom in U.S. plant construction will soon lead to power surpluses in the U.S. And a weakening global economy means it's iffy whether foreign demand can pick up any slack.

Nor can Immelt count on GE's other industrial powerhouse, its booming aircraft-engine business, to keep gunning growth. With a worldwide slowdown in air travel, neither GE Aircraft Engines nor GE's monstrous aircraft-leasing arm, GE Capital Aviation Services, will go unscathed. "That will put pressure on aviation businesses, including GE," says Adam M. Pilarski, a senior vice-president at airline consulting firm Avitas Inc.

Immelt also faces a problem with GE's big kahuna, its financial-services arm. Today, GE Capital accounts for 50% of revenues--more than all of the industrial businesses combined. But it can't get much bigger than that unless the manufacturing units grow. No one at GE wants it to become a financial-services firm with an attached industrial arm; they fear that investors, who are wary of financial-services firms, would penalize GE's vaunted multiple.

Add it all up, and Immelt has plenty to concentrate on without having to worry about Honeywell. At the least, Immelt will need to hunt for new deals. Already, he has shown interest in buying the much smaller French engine maker Societe Nationale d'Etude et de Construction de Moteurs d'Avion, otherwise known as SNECMA. In the end, that may be a far more manageable way to get started.

Moore covers General Electric from New York.

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