GE breakup signals demise of conglomerates

BY MORRIS R. BESCHLOSS

PVF and economic analyst

The new era of conglomerates, reborn after private equity partners patched together disparate business components under a dominant financial infrastructure seems to be coming to an end. Such investment banking groups as kkr, the Carlisle Group, Blackstone and BlackRock had become the driving force behind this bundling of separate entities. Their only commonality factor was a financial apex that made them saleable on Wall Street, or subject to ‘flipping’ after a multi-year hold.

Originally emerging in the 1970s when U.S. Industries brought together independent businesses with nothing in common, such giant publicly-held consolidations as Gulf & Western Industries, itt (once International Telephone & Telegraph), iu International (International Utilities) and Textron used major bank financing to bring new mega-businesses to the investing public. Unlike the current spate of conglomerates, the original plunge into conglomeration was based on the leverage of underlying assets, to support necessary funds for consummating the buyout.

This was interrupted by leveraged buyouts in the 1980s and 1990s when a reaction to this spate of non-transparent combinations generated an entrepreneurial rebellion by independent managers, who believed businesses can best be run by professionals who intimately know their specific industry sectors. Many of these rugged individualists, who had remained with their sold-out companies, were itching to get back to the specific turf from which they had successfully emanated. This was made possible by leverage buyout specialists, who put together the monetary packaging allowing this new wave of entrepreneurs to get back into running their own companies.

A new wave of conglomerates emerged in the 1990s as private equity partnerships used their financial acumen to revive the original approach under the leadership of corporate wizards, who believed that commonality is strictly based on financial leadership. Inevitably, those in charge had no particular interest in the end-use industries that comprised the component manufacturers’ rationale. Their primary direction was almost exclusively based on return on investment.

Under the current pressure of the ongoing credit crunch, such mega-giants as Tyco International and General Electric have recently thrown in the towel on this strategy and are again reorganizing along functional industry lines. Tyco launched their new approach earlier this year, while ge has come forth with a radical shakeup more recently. Another factor forcing this revised approach has been the lack of identity of prominent brand names with particular business sector, depriving the parent of the underlying strength of component corporations. The current bi-polar U.S. economy is a salient example of how the parent is tarred with the brush of the losers, while not necessarily gaining the benefits of the winners.

Under the further pressure of flagging share prices and a huge financial services segment suffering under today’s financial sector, ge’s ceo Jeff Immelt has announced a planned splitting of ge into four segments:

• Technology Infrastructure
• Energy Infrastructure
• GE Capital
• NBC Universal.

These represent the sectors that Immelt believes puts the company in the best position to accelerate profit growth and revive the group’s stock price. It also emphasizes Immelt’s recognition that the transparency of a company’s business sectors adds cumulative value to ge’s recognition as a whole.

The move also symbolizes ge’s steady shift away from its manufacturing and consumer product groups, most of which the company aims to spin off to shareholders by next year. They will be kept separate from the restructuring. This reorganization will also allow it to focus on those businesses that are more relevant to the changing demands of global progress.

GE’s Healthcare, once a stand-alone operating arm, becomes part of the new technology group, led by John Rice, a vice chairman. Immelt expresses high hopes for this unit, due to the contemplated growth of that sector, and Rice’s proven track record in operations management.

The restructuring of large conglomerates will likely be the wave of the future- as credit conditions remain tight and global evolution calls for a focus on those industries that have taken up new leadership roles.

America’s king coal is about to be dethroned

It has become a matter of fact that the U.S. refuses to tap into its vast natural resources, at a time when the nation faces what could be the worst energy crisis in its history.

As billionaire hedge fund magnate and oil specialist T. Boone Pickens has emphasized, “America’s annual expenditure of $700 billion for foreign oil represents the greatest transfer of a nation’s wealth in history.” A major chunk of this largesse falls into the hands of opec, most of whose members are latently hostile to the U.S., if not outright supportive of anti-American terrorism.

In spite of circumstances that call for a massive exploitation of more than a potential trillion barrels of U.S. oil reserves, political wrangling and a hardened standoff between Republicans and Democrats on a drill/no drill confrontation, it’s doubtful that any Congressional compromise should be expected before the White House changing of the guard next January, if then.

In fact, with the climate change progenitors establishing a foothold in both parties, America’s greatest energy potential resource -- coal -- is getting bad reviews from both sides of the aisle. The U.S. happens to contain the largest single reserves of coal, estimated in the hundreds of billion tons.

Both the Obama and McCain factions are on board with the ludicrous cap/trade bill, which would put the main onus of co2 and greenhouse gas restrictions on the U.S. Only nuclear energy and natural gas would be held harmless, but even they have their detractors. While China, India and other emerging nations would be given a multi-year pass, the struggling U.S. industrial sector would be the leading victim of this bill’s passage, while coal would be designated Public Enemy No. 1.

It’s the ultimate irony that today’s booming U.S. coal industry is largely adding huge revenues to America’s record-breaking export sector. The Chinese and Indians, who are building scores of new power generating stations, have no compunction about using coal, but need to secure America’s vast supplies to expand their ability to provide electricity for their rapidly expanding populations.

But even without passage of formal legislation, America’s coal-fired utilities are slowly being shut down; and those already on the drawing boards cannot get bank financing because of fear that these debts will never be repaid; under the certainty that coal will be considered an unacceptable collateral, even though the expansion of power is way behind acceptable levels today. In fact, demand vs. future supply puts this nation’s electricity usage at a 2:1 disadvantage.

Since America’s political power structure is increasingly hostile toward imported oil converted from coal derivatives, such as Canada’s tar sands, even that desperately needed supply may eventually be considered unacceptable. This would leave the U.S. short of its No. 1 oil providing producer -- Canada.

Even a convincing clean coal technology would be looked at with a jaundiced eye; and the idea of coal liquefaction -- which was effectively used by Germany in the last years of World War II and by  South Africa’s Sasol Corporation -- would not be able to handle the anti-coal antipathy that the environmentalists have made unacceptable under any circumstances.

Since coking coal is an indispensable element in the manufacture of steel, which is on a red-hot streak, both Indian and Russian steelmakers are dickering with U.S. major coal providers to ink long-term buying contracts. Even that door may be shut as the environmentalists become ever more powerful.

America needs to wake up to reality, but there is no bugler to blow the horn. Don’t be surprised if blackouts and brownouts become increasingly prevalent as shortages begin to manifest themselves in the years ahead.

Oil drilling initiatives at stand still

Senate Majority Leader Jack Reid (D-Nev.) has duplicated the tactics of House Speaker Nancy Pelosi in bottling up legislation of which they don’t approve. Whereas Pelosi refused to move the negotiated trade deal with Colombia forward, Reid is putting the kibosh on allowing the Senate to debate the overall concept of drilling, fearful that enough Democrats will desert the party line to join the Republicans in passing pro-drilling legislation while Bush is still in office to sign the legislation.

With less than three months left before the November 4 Presidential election, the majority Democrats in both House and Senate realize that their post-election control of both Houses could control whatever legislation comes out of the White House, even in the unlikely circumstance (they believe) that John McCain takes the Presidency.

The intimidation of election fever that could sway breakaway Democrats’ help in passing pro-drilling legislation can only be stopped by the Democrat leaders in the Senate and House from getting committee clearance and floor debate before a pre-election vote.

These partisan leaders consider post-election action moot, especially if Barack Obama, who was against drilling is in a leadership position after January 20, 2009. Unfortunately for the U.S., neither China, Russia nor Venezuela are hamstrung by the political dithering forced onto the American people.

Venezuela has cut a tripartite deal with China and Russia that will victimize the U.S.’s availability to maintain the necessary inflow of crude oil into American storage tanks.

China is working with Cuba to tap into oil and gas reserves off the coast of Florida. Even though the Cuban side of the straits are within sight of Key West, Florida, there is no American drilling allowed, despite the lifting of restrictions by President Bush, and the support of Republican governor Charlie Crist.

Even the support of drilling off the Florida coast awaits Congressional approval, which will not come, as earlier explained.

In addition, Chinese firms are planning to start slant drilling off the Cuban coast near the Florida Straits, tapping into U.S. oil reserves that are estimated at 4.6 to 9.3 billion barrels. These deposits run throughout Latin America, the Carribean and along the U.S. Gulf Coast. This compares with 4 to 10 billion barrels believed to be beneath the Alaska National Wildlife Refuge, where drilling is held up in Congress due to the environmental groups worried about the extinction of the caribou. Permission to drill in the Refuge, supported by the state government, has most recently failed by only two votes in the Senate, even though experts have guaranteed that drilling in Anwar presents no environmental hazard, or danger to the indigenous caribou.

There are other dangers awaiting the fate of previously U.S.-bound oil supplies. Mexico, facing the implosion of its large Cantarell Oilfield, is expected to be a net oil importer within five years. The U.S. gets about 40% of its imported oil from Mexico and Venezuela.

In setting up a working arrangement for oil development in the Florida Straits, China has already reopened an abandoned Russian oil refinery in Cuba. Much of the gasoline is destined for Freeport in the Bahamas, where the Chinese front company, Hutchinson Whampoa, has developed a massive port facility and airfield. With the refinery reopened and expanded, it will also meet all of Cuba’s needs.

Wake up America, before it’s too late. You have no choice but to do what 94% of all energy reserve holders in the world have done -- reverted back to the nations that own them and then leased them back to the oil companies. Any alternative strategy, not owned by the U.S. will leave America on the edge of limitless energy dependence.                   

Morris R. Beschloss, a 51-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst for The Wholesaler.