GE planning to plug in on investment banking in a big way
Power. General Electric is into power is almost every way, shape, and form. From light bulbs to locomotives, dishwashers to jet engines. This year -- if and when its latest acquisitions go through -- the company founded by Thomas Edison, and now headed by John F. Welch Jr., will also do the ``NBC Nightly News'' and investment banking.
On Friday, the Fairfield, Conn., conglomerate announced its intent to buy 80 percent of Kidder, Peabody & Co., one of Wall Street's oldest privately held securities firms, for an estimated $600 million.
The move follows GE's agreement in December to buy RCA Corporation -- owner of, among other things, the NBC network -- for $6.28 billion. The GE-RCA merger, the largest deal ever involving non-oil companies, will probably be completed late this year.
With Kidder, GE bolsters its General Electric Financial Services unit. With blue-chip GE behind it, Kidder (whose management would retain 20 percent ownership) should get the kind of cash it needs to participate in billion-dollar investment deals now dominated by the likes of Salomon Brothers and Merrill Lynch.
``We're both eager to expand . . . in investment banking as much as we can,'' GE Financial Services president Robert C. Wright said at a New York news conference Friday. Kidder, Peabody president Ralph D. DeNunzio concurred. The deal, he said, ``brings to us business synergism as well as capital.''
Although Kidder, Peabody was having a record year, Mr. DeNunzio noted that because of its modest capital base it missed out on much of the surge in activity in leveraged buyouts.
But now, he said, ``Anybody who looks at the business and realizes that Kidder, Peabody is now 80 percent owned by GE will know that the capital will always be available if the opportunity to earn money on that capital is there.''
GE will contribute $130 million to Kidder at closing and Kidder will come up with $20 million in equity capital. That would bring Kidder's capital base back to current levels after Kidder's partners take their cut.
``It is so clear that capital is increasingly important in investment banking,'' says analyst Nancy Young at Cyrus J. Lawrence Inc. ``The markets are moving to much more trading orientation, and that requires capital.''
She points out that this is one more example of the explosive growth of investment banking and the intensifying competition that the banking industry will feel from operations like GE Financial Services and General Motors Acceptance Corporation.
``It really catapults GE into corporate finance,'' says Nicholas Heymann at Drexel Burnham Lambert.
GE Financial Services is already the umbrella for GE Credit Corporation and Employers Reinsurance Corporation. With Kidder, it gets ``the ability to make bloc trades, a distribution system, syndicate offerings, beefed-up corporate finance, and an M&A [merger and acquisition] shop,'' Mr. Heymann says.
Although Kidder, Peabody has a retail network, most analysts think GE will not highlight this area, choosing instead to become a powerhouse in corporate finance. GE's Mr. Wright, however, sought to counter that notion, saying the retail network is ``essential to serving the middle market'' and would be kept.