“Will That Be Private Equity Paper, or Plastic?”

Sara Michelmore, Cowen: “My question was specifically to the molecular business…I assumed if it had been available for sale that GE would have been interested in it.”

Miles White, Abbott Labs: “That’s a good assumption.”

—Abbott Conference Call, 1/18/07

I don’t know about anybody else who listened to that call, but the folks at Abbott sure sounded to me like they pulled off a good one by selling the least valuable bulk of their clinical diagnostics business to GE for a cool $8 billion.

Certainly Abbott CEO Miles White, as the above dialogue demonstrates, made it clear on the call he thought he was keeping the good, faster growth stuff and selling the plain-vanilla, lower growth stuff.

Funny thing is, that’s exactly what Jeff Immelt was telling Wall Street’s Finest the very next morning, during a conference call to discuss earnings and some details on the multiple acquisitions he recently pulled off, including the aforementioned deal with Abbott.

Now, the $8 billion Immelt agreed to pay amounts to roughly three times 2006 sales for the Abbott businesses, and a whopping 25 times their 2006 operating income, based on numbers provided by Abbott and later massaged by Wall Street’s Finest—yet nowhere in the GE earnings conference call did the phrase “25 times operating income” come up.

Of course, Jeff Immelt didn’t get to where he is by being an easy mark for companies desperate to sell their losers, and his healthcare team made a good case for getting sales and margins of the acquired Abbott businesses up substantially by “Year 3,” to the point where the deal price would look like a more comforting 11 times operating income, based on my math.

Furthermore, Immelt certainly knows a great time to sell the dregs of his own portfolio when he sees it.

Private equity buyers need to do deals, if only for the sake of doing deals, so why not swap a cyclical, low-multiple-from-Wall-Street business (GE Plastics) for a stable, value-added, long-term grower (Abbott’s diagnostic business) for roughly equal multiples of future operating income?

But Jack Welch’s successor better hope for two things:

1. His healthcare team comes through with those “Year 3” numbers on the Abbott business, and;

2 The buyers of GE Plastics don’t make the same kind of quick killing the Hertz buyers did when they picked off poor Bill Ford.

Otherwise, Immelt’s own words from last week’s conference call could come back to haunt him:

When you see us do or see me do $15 billion in two weeks, sometimes you say is he crazy? But this is all part of a 5-year disciplined, diligent, long-term focus on the company and I just want to give you a sense for that. And basically on strategy. You know, redeploy from slow growth into high growth and a real target on health care and infrastructure.

Jeff Matthews I Am Not Making This Up

© 2007 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.