Takeovers can be bountiful. When two companies get together, when one company buys another, there can be so much value created that you have to marvel that it didn't happen already. Takeovers can boost the value of all stocks in a sector, and therefore increase the value of the market. That plays out so regularly these days that you have to factor it into the market.
We saw it just today when Hasbro HAS made overtures to Mattel MAT, which would be simply brilliant. Mattel's stock soars three bucks on just the word of talks, but more important, Hasbro's stock rallied gigantically on the news because the synergies are so great and the prices are so right. You can call it HAS-MAT, I call it money and it would be sensational for all involved, especially because Hasbro would be taking advantage of the bankruptcy of Toys R Us, which crushed the earnings of Mattel and helped eliminate the company's long-standing large dividend, which grew larger and larger, of course, as the stock went down.
You see the gains that can occur in semiconductor land when Broadcom (AVGO) decided to pursue Qualcomm (QCOM) , a company with a fabulous tech reputation but a not-so-hot reputation when it comes to disputes, mainly a dispute with its largest customer, Apple (AAPL) . Qualcomm's stock ticked at $70 a little more than a year ago before crashing down to $50 as the lawsuit with Apple got ugly, and legal experts began the chatter that Qualcomm's taking its life in its hands by taking on the richest company in the world.
Then along comes Broadcom, which, again, like Hasbro, sees the opportunity to combine with Qualcomm to take advantage of the self-inflicted wounds that drove that drove that stock so low. Now Qualcomm emphatically rejected Broadcom's bid, saying the $70 purchase dramatically undervalues the company, and I couldn't agree more. But it's also obviously not the highest that Broadcom can pay, even as the $105 billion deal is the biggest ever among technology stocks.
When the deal was first announced, Broadcom's stock soared along with Qualcomm's until you heard the definitive "no" from the latter. That's correct, as a deal with Broadcom would quickly solve the Apple issues and everyone would live happily ever after. Qualcomm's stock rallying tells you something could be afoot, and I would continue to own it knowing that if Qualcomm loses in court vs. Apple, you have the Broadcom safety net out there.
Then there's Tyson (TSN) , which bought meat company Hillshire Brands for $7.7 billion three years ago, beating out Pilgrim's Pride (PPC) , another meat company, by more than a billion dollars. At the time, I thought it was a dramatic overpay. But it turned out to be brilliant and Tyson's stock zoomed from the low $40s to $75 as the company consistently beat expectations because of a switch in diet toward more protein. It wasn't an overpay, it was an underpay. This morning's earnings report confirms what Tyson CEO Tom Hayes said on Mad Money not that long ago, that the combination of the two companies can dominate at McDonald's (MCD) , at the supermarket and in exports.
And then there's General Electric (GE) .
GE has become the poster boy for bad acquisitions, going all in for oil and gas at the peak and all in on power when the business was about to turn down. GE acquired Lufkin, a company that helps boost recovery for aging fields, for $3.3 billion back in 2013 and then bought Baker Hughes (BHGE) , a gigantic oil service company, last year, paying out a $7.4 billion special dividend to Baker Hughes. All bad.
But not as bad as the $10 billion acquisition of French giant Alstom's power business.
At the same time, GE sold NBC to Comcast (CMCSA) and let go of a pretty good financial business a few years ago that would be coining money right now. (Broadcom, Apple, General Electric and Comcast are part of TheStreet's Action Alerts PLUS portfolio.)
You could not be as wrong as GE, you could not have a worse track record.
How bad is it?
Bad enough to force GE to cuts its dividend in half. Bad enough to lose 8% of its value today alone, after falling from $28 a share in June.
Of course, it wasn't just the dividend that got lopped, it was also the earnings estimates. The 2018 number has declined steadily from $2 to $1.80 to $1.50 and now down to roughly a buck.
Now before I tell you what I think can happen here, let me just say that I got GE wrong. I believed in the numbers the company put out. I was suspicious of the oil and gas and Alstom power buys, but the company was so bullish about the numbers and the synergies that I found it difficult to be as skeptical as I would like. I should have said the story was too good to be true and I should have been far more critical of how GE accounted for its numbers because they were like none other. They were totally opaque.
And the methods that were used were suboptimal when it came to disclosure, otherwise I -- and pretty much everyone else -- would have sold the stock a long time ago.
I have been very critical of both myself and the old regime, but I thought today was a breath of fresh air. New CEO John Flannery is going to sell a bunch of divisions to raise money, including oil and gas and, perhaps most important, change the board of directors, many of who checked off on so many wrongheaded decisions. This board showed no accountability and I, personally, wish they all would.
The good news here is that Trian's Ed Garden has joined the board, and while having one truly involved and active director may not seem like much, it could give Flannery cover to make even tougher choices, ones that must be made. The board is shrinking from 18 to 12, though, so Garden might have undue influence, good news given his reputation for cutting the fat and changing the culture of companies he digs into.
Is it a buy?
That's rough. The CEO called next year a "massive heavy lift" and you probably don't want to be part of a massive heavy lift. More important, if the company is only going to earn $1 per share, then it should be valued at $17 because that's the price to earnings multiple of the weakest conglomerates in the market and this one is by far the weakest.
It doesn't do any good to call GE a travesty anymore. That's been said. It doesn't help much to rail against its ill-advised accounting. That's been done. It certainly doesn't do any good to call out the previous CEO again, although I do think slagging the board of directors makes sense because I would like to see them all go. Anyone who checked off on this mess shouldn't be on the board.
All that said, if owned it, I wouldn't sell it down 40% year to date because if Flannery is at all successful with cleaning house and cutting expenses, then I think it can earn north of a buck, which would make the company too cheap to ignore.
What matters, though, is that Flannery has to act fast. There can be no sacred cows. No more hype. No more unfulfilled promises. Out-of-control expenses must be reduced, divisions have to be separated and GE, if necessary, has to disappear as we know it because to say it was wrecked by previous management is no exaggeration.
I often talk about how important management is to the value of a company. I usually speak of it positively. Here, though, GE's the benchmark of bad, the only industrial company of the era going backward. What a shame.
