On the face of it, it looked like a brilliant deal. From a bigger picture perspective, though, it looks like General Electric
I'm speaking, of course, of Friday's announcement that GE will sell its Homeland Protection unit (GEHP) to French technology group SAFRAN. In the press release, GE confirmed that the same people who took Motorola’s
Why the deal looks good
Paying $580 million for an 81% stake in GEHP (and its $260 million in annual revenues) implies a value of about 2.75 times sales for the business ($715 million). And I admit, this sounds like a great deal for GE, whose own stock fetches a paltry 0.7 times sales. Conversely, it looks bad for Safran, which commands only a 0.36 multiple.
And why it actually isn't
But while I'll concede there's some logic behind selling GEHP, there's little cause for celebration among GE shareholders today -- and plenty of reason to weep.
Five years ago, Immelt orchestrated the purchase of InVision Technologies -- the company that became the backbone of GEHP -- for $900 million. Today, he's selling a controlling interest in both InVision and and Ion Track (the other major component of GEHP), for a price that implies a valuation 21% below what he paid for InVision alone -- that's about a negative 4.5% annualized return on the investment.
Why would GE cash out at a loss? The company tells us it's because GE bought into the homeland security market "at the peak" back in 2002-2004. But that simply ain't the case. I mean, yes, logically, the need to improve port and airport security in the U.S. was certainly high in the years immediately following 9/11. But was it really "the peak?" I'd argue not.
Three companies compete closely with GEHP in the field of airport security. One of them, American Science and Engineering
Of these three, OSI is the only currently trading below where it did when GE announced its InVision acquisition in 2004. The other two stocks sell higher today (in AS&E's case, much higher) than in mid-2004. And even if you take GE's spin literally, then it looks to me like AS&E's stock "peaked" in early 2006, OSI Systems topped out mid-2007, while L-3 didn't peak until early last year.
Simply put, GE's explanation doesn't wash.
You bought it, GE ... and then you broke it
On the other hand, perhaps GE really means to say that its business peaked in 2004. As in, around about that time, InVision and Ion Track combined to make more than $460 million in annual sales. According to last week's sales announcement, though, the GEHP division did a mere $280 million worth of business in 2008.
... and now you sell it
To me, it looks like GE's mismanagement vaporized nearly 40% of GEHP's business in five years' time. So perversely, I could probably argue that the fact that GE's is managing to extricate itself from this fiasco at "only" a 20% loss deserves applause.
But I won't. You see, just because GE broke the business doesn't mean it should sell out at a loss. Just as I disagree that GE bought "at the peak" of the homeland security business, I also disagree that it's going down from here.
To the contrary
Business has never been better for GEHP's rivals. Alongside bigger defense contracting names like General Dynamics
- First and foremost, Osama bin Laden and his ilk have not given up on their airplanes-as-bombs fantasies. They'll try again, and it behooves the government to stop them -- and to spend money on the technologies that will help to stop them.
- Second, as the saying goes, whatever you think about President Bush, "at least he kept us safe." Does anyone think that President Obama wants to be known as the man who failed in the one area where Bush arguably succeeded?
I sure don't. What's more, Obama made securing the nation's ports a key priority of his election platform. Since being elected, he has continued to move in this direction by calling for an "airport security" tax on flyers. The funds, he says, are needed to pay for the increased security of air travelers, which to me suggests that he does indeed intend to increase such security.
GE didn't buy this business at its peak, but it sure looks to be selling out at the bottom. Such manhandling of shareholder capital should get GE shareholders fighting mad.
As for me, though... well, as a shareholder in AS&E, I'm only too happy to know that soon, my company won't have to compete with GE for homeland security projects anymore -- now we'll be competing with the French. L-3 and OSI shareholders can join me in relishing the prospect.