What Did General Electric Company Buy for $9 Billion?

Some companies like Facebook make waves in the media when they write a check to acquire a flashy upstart. As a case in point, look no further than the social media giant's recent $19 billion WhatsApp purchase.

Other companies like General Electric attract a little less hoopla when they take out their pocketbook. Yet when it's all said and done, GE spends a hefty sum gobbling up companies year after year. In fact, when I heard GE management refer to the "$9 billion" in acquisitions during the latest conference call, I was taken aback. What exactly did GE buy? And, more importantly to a shareholder like myself, was it a worthwhile investment?

To get to the bottom of this, I first compared the $9 billion figure with the total dividends and share buybacks conducted by GE in 2013. After all, 9 billion might sound like huge figure, but it all depends on the context.

After some digging, I found that the true total, not rounded up, was actually $8.769 billion. The following chart shows that GE actually spent double that amount on buybacks and dividends in 2013:

In total, GE's cash flow statement for 2013 reveals that $18.1 billion was spent on share repurchases and dividend payouts. That makes the acquisition activity look relatively small, especially if you consider that only $1.6 billion in cash was dedicated to M&A because of the timing of deals or other non-cash payment arrangements.

Nevertheless, there's still a hefty sum of capital tied up with acquisitions that could ultimately be returned to investors. With that in mind, let's take a closer look at the major deals closed by GE or its subsidiaries.

The following chart lists each of GE's "closed" transactions throughout the year, from largest to smallest. The column labeled "target" represents the asset or company purchased, the "buyer" column refers to GE or a subsidiary, and the "size" is the sum of money involved in the transaction. Finally, I provided links to conduct further reading if so desired:

All figures in millions $USD. Source: GE filings.

As you can see, the two headline transactions completed in 2013 were deals to acquire the Italian company Avio's aviation business and the Texas-based oil pump-maker Lufkin Industries. Combined, these accounted for $7.7 billion, or 88% of the total.

The third-largest purchase relates to a renewables business bought from the Spanish utility Iberdrola, which actually amounted to an acquisition of wind farms that the utility player was looking to sell to pay off debt. The rest of the transactions, including the deal with alternative energy company First Solar, relate primarily to hard assets acquired by GE to integrate into its related business.

For our purposes, only the first two targets are particularly interesting. This is because Avio's (now known as Avio Aero) and Lufkin's businesses could take some time to integrate and payoff for GE. With Lufkin, for example, GE paid a significant 38% premium on top of the company's market value.

The theory on this merger is that the surge in oil and gas drilling in North America will continue, and Lufkin's pumps will be increasingly handy in extracting from deep reservoirs. The reassuring aspect of Lufkin is that its been around since 1902, so GE wasn't snatching up a fly by-night wildcatter with little industry roots. Further, GE's been known to buy "tack-on" operations to compliment it's existing businesses and allow those outfits to scale quickly. The Lufkin purchase would fit right into this mold.

Compared with the Lufkin buyout, the Avio acquisition appears even less risky. This is simply because Avio's unit had acted as a supplier for GE for almost 30 years, with GE and its joint venture companies providing more than 50% of the company's revenue. Going forward, GE will allow Avio to broaden its product portfolio and serve a wider variety of customers.

Foolish takeaway
GE has a long history of spreading its tentacles far and wide, and it's one of the few American conglomerates this side of Berkshire Hathaway with undeniable staying power. With 2013's acquisitions, GE picked up a couple of tangentially related operations and a host of hard assets that fit well into the company's portfolio. I wouldn't be too concerned that GE's nearly $9 billion outlay won't payoff down the road. And I wouldn't be surprised if it spends a similar amount in 2014: It already snagged its first $1 billion target and just wrapped up a $3 billion debt offering, so GE's loaded with firepower.

A GE wind turbine. Source: General Electric.