General Electric's Deal Is Offensive

Has General Electric (NYSE: GE  ) learned nothing from The Crash?

When financial markets went to heck-in-a-handbasket back in 2008, companies that dipped their hands too deeply into the capital-markets honey jar found themselves stuck with billions of dollars' worth of bad loans. General Electric in particular ventured far afield in search of yield, and wound up writing down loan values and booking billions of dollars in losses. By early 2009, GE had lost its triple-A debt rating and slashed its dividend. Its stock traded in the single digits, as the company underwent a true near-death experience.

So naturally, just as soon as management got the ship righted, it ran off and bought $1.6 billion worth of Citigroup (NYSE: C  ) receivables. Crazy!

But sometimes, crazy-good
I'm not too impressed with the first half of GE's grand plan to return to "playing offense," as GE Energy chief John Krenicki put it yesterday. On the other hand, I do see some merit in GE's other move: a deal to buy oil-and-gas equipment maker and former Halliburton (NYSE: HAL  ) subsidiary Dresser from a pair of private equity shops, which have been running it since 2007.

The acquisition brings GE into greater competition with industrial giants like Emerson Electric (NYSE: EMR  ) and Tyco (NYSE: TYC  ) in the valves space. On the other hand, Dresser, which specializes in engines and control valves, strengthens GE's position relative to oil & gas incumbents Schlumberger (NYSE: SLB  ) and Baker Hughes (NYSE: BHI  ) .

More importantly, it looks like GE is getting the company at a really attractive price. With $2 billion in annual revenue, Dresser at 1.5 times sales will cost GE only a modest premium over its own 1.2 P/S ratio. Moreover, with $318 million in profits netted last year, Dresser boasts a whopping 15.9% profit margin. That's more than twice GE's own net profit margin, and it suggests that GE is more than getting its money's worth for that small P/S premium.

Foolish takeaway
GE Vice Chairman John Rice tells us he aims to spend $30 billion or so on similar deals over the next two to three years. Let's just hope we see fewer of billion-dollar credit gambles, and more strategically savvy purchases.