GE-UTC round up, v.1

 - 
11/12/2009
There's a ton of stuff out there on the UTC-GE deal. It's nice being part of the mainstream once in a while: Lots to link to. First up, the Motley Fool take on the deal, which raises some interesting points. Just look at his first four bullets:
• Strapped for cash, and carrying the same kind of underperforming financial services division that's hobbled Textron (NYSE: TXT) and Harley-Davidson (NYSE: HOG), GE plays the part of "motivated seller" today. • It's unloading its Security division on United Tech (UTC), selling off GE Security's $1.2 billion annual revenue stream for a mere $1.82 billion -- about 1.5x sales. • GE Security is part of GE's Technology Infrastructure business, where GE earns a 17.6% operating margin. • UTC's own Fire & Security division gets only an 8.4% operating margin on $6.5 billion in annual revenues.
First: It's hard to believe the GE is so hard up for cash it needs to sell off the Security division, but Rich Smith would know more than me. Good for UTC for seizing on an opportunity and playing from a position of strength. They tried to hammer Diebold that way last year, but it didn't work out. Probably something to pat the Diebold board on the back for, really. Second: This is an interesting point that I haven't seen made much, and it makes me feel a little more sane. Taking notes today on the UTC webcast with Ari Bousbib, I had him putting Edwards at $500 million, a locking business I didn't really know about at $150-$200 million, and the rest of the systems business at $500-$600 million. I didn't put it in the story, though because I thought I was missing a piece, and GE doesn't break out its Security revenues. But, no, that's really what they're at: $1.2 billion. Dean Seavers has put the company at $2 billion as early as 2010. Was that all bluff? Or has the economy hit them hard? Third and fourth: Ari claimed today that the Fire and Security business at UTC was increasing operating margin by a point a year right now, and had accelerated that to a 1.5 percent annual pace over the last two quarters. He says they can hit 15 percent by 2012 or so. Where are all those efficiencies coming from? Has to be a major leveraging of a central station and other RMR service in there somewhere. There's no way UTC gets that with product sales alone in this environment right now. Thus, you've got to think channel conflict, like Jeff Kessler mentioned when I spoke with him, is going to be a major hurdle for UTC. Everybody sells Lenel, but if Red Hawk is getting the sweetheart deal, people are going to be looking for another partner in a hurry. But then here's the Fool's takeaway:
• Increase its Fire & Security revenue stream by 19%. • Buy what are, in all probability, product lines that earn higher profit margins than its own. • Do all this without paying much of a premium to its own market valuation.
I understand points 1 and 3, but why is the assumption that GE's product lines earn a higher profit margin? I heard talk from Ari today that GE's manufacturing facilities are still in "high cost" areas, and that UTC might be ahead of them in off-shore cheap manufacturing. Maybe I'm missing something, but it seems like a leap there.