Commentary: Why GE Went for a Little Glitz

Jeffrey R. Immelt liked the movie Seabiscuit, and he even enjoyed himself once at a Universal Studios Theme Park in Orlando. But that's not why he wanted to merge Vivendi Universal's (V ) entertainment assets with NBC in a proposed equity deal valued at $14 billion. The chairman and CEO of General Electric Co. insists that critics who say he was just snapping up a bargain from an anxious seller are wrong as well. "We're not in the business of flipping assets," says Immelt. "If I didn't think this improved our business strategically for the long-term good of our shareholders, I wouldn't do it."

The NBC-Universal deal fits neatly into Immelt's grand plan to transform his industrial and finance giant into a leader of the Information Age. For Immelt, content and distribution are the name of the game -- whether it's critical health-care data for GE Medical Systems (GE ) or a cable asset like USA Network.

And what of those who thought GE has long wanted out of the volatile media game? Immelt says they've got it wrong, too. He has long said that he wants to increase the heft and value of NBC, which had the company's biggest profit jump last quarter -- a 26% gain, to $688 million. But a bigger NBC inevitably meant moving beyond being just a broadcast network. The Vivendi assets give him a chance to do just that. "This is about stuff we know how to do," says Immelt, who also presided over the acquisitions of Spanish-language broadcaster Telemundo Communications Group Inc. (GE ) and the Bravo cable channel since coming to the top job two years ago. "We understand the nuances of the industry and where it's going."

Moreover, the deal meets key characteristics that Immelt wants to see in all GE businesses: ties to technology, proprietary content, multiple revenue streams, control over how GE goes to market, and capital efficiency. "You don't have to build a film factory every year," he notes.

Sure, it's risky pairing the profit-obsessed disciplinarians from GE with the artistic Hollywood types churning out shows and movies for Universal -- a risk Immelt's predecessor Jack Welch was never willing to take. But Immelt needs to branch out if he is going to reshape GE into more of an information- and services-based company.

What about the entertainment industry's infamous hit-or-miss nature? Immelt and NBC Chairman Bob Wright are betting the volatility of moviemaking and theme parks will be smoothed over by steady revenues from other businesses, including cable networks and Universal's library of 5,000 film titles and a combined cache of 32,000 TV episodes. That could prove a gold mine in the new era of video-on-demand. Says Immelt: "It has become even more important now because there are so many different ways people view programming today."

Still, Immelt understands the perils. He acknowledges that running theme parks, for one, is "something that we don't bring any management expertise to." And as movies and TV enter into the digital era, many worry that they will face the problem of illegal downloads. GE's famed management expertise, moreover, is no insurance against a box-office dud or disastrous tourist season.

But for now, investors like the new script. GE shares, which have dropped almost 50% from the giddy heights reached under Welch's regime, were up more than 5% in the two days after the deal was announced. One reason: The deal won't dent cash flow or earnings. Analyst Kerry Stirton of Sanford C. Bernstein notes that media companies often trade at a multiple of up to 27 times forward earnings, vs. the 18 multiple that GE commands. While the $13 billion in combined revenues of NBC Universal last year is still less than 10% of GE's total, it adds a more lucrative element to the mix.

So will GE do a better job than others at reining in the profligate ways of the entertainment industry? GE -- which pays heavily for the mega-hit Friends -- knows as well as any how hard it can be to try hammering down that $20 million salary for the star of a big production when a competing studio is ready to offer even more. Still, if any corporation has a chance of making Hollywood more efficient, it's likely to be the buttoned-down folks at GE.

By Diane Brady

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