GE Capital under G. Wendt: Bigger than Citicorp:" Blowing bubbles ".
"Though it's not called a bank, what General Electric has built is one
of the world's biggest banks. Apparently what works in manufacturing works
in financial services. "
Blowing bubbles
By Dyan Machan
FORBES April 1997
PEOPLE WANDER the halls, murmuring, 'I want to be a bubble,'" jokes Michael Fraizer, who runs General Electric Capital Services' consumer savings and insurance group, one of its bigger bubbles.
What's a bubble and what's so hot about becoming one? It's the way a manager makes his mark at GE Capital. GE Capital is a collection of 27 separate businesses, united only by the fact that in every case the raw material is money. Each of these businesses fosters other businesses. When one of these smaller lines hits $25 million in aftertax earnings, it becomes a full-fledged bubble—so called because GE Capital's organization chart shows operating segments radiating away from the central core like so many bubbles.
Put together, GE Capital's bubbles are one of the fastest-growing parts of Jack Welch's $79 billion General Electric Corp. They contributed more than 38% of the parent's $7.3 billion in aftertax income in 1996. If it were an independent company, GE Capital's $33 billion in revenue would rank it 17th on the 1997 Forbes Sales 500, ahead of Citicorp. Its $2.8 billion in aftertax earnings would put it in the top 25 of the Forbes Profits 500, ahead of Hewlett-Packard, Berkshire Hathaway and Microsoft.
Do you have mortgage insurance?
One of GE Capital's bubbles likely underwrote it.
A store credit card? GE Capital is big here.
There's a 10% chance that the airplane you fly in is owned
by GE Capital, the largest owner and lessor of commercial
aircraft.
It is also the largest lessor of railroad cars, and of containers.
Way back in 1933 GE Capital was started to help hard-pressed consumers finance the purchase of refrigerators and washing machines and the like, but it was under Jack Welch and GE Capital's chairman, Gary Wendt, that it has emerged as one of GE's mightiest money machines.
"We began [branching out] by financing other manufacturers for trucks and tractors," says Wendt, 55. "Then we realized there are institutions called banks, so how about receivable inventory financing? Then came private credit cards. A new market was developing in financing airplanes. We got into that."
Of GE Capital's growth, Wendt says, "It was evolutionary."
Evolutionary—but revolutionary. Other big corporations had finance arms, but few extended them beyond financing their own products.
General Motors Acceptance Corp. was once far bigger than GE Capital, but it stuck close to automobiles. In 1993 GE Capital surpassed GMAC in total assets and today is twice as big.
What is extraordinary about GE Capital is that it is a huge success in a business that is only distantly related to GE's basic businesses.
How many manufacturing companies can successfully run a bank? But then how many companies have so successfully blended big-company strength with small-company entrepreneurial vigor?
Wendt explains: "We tell [our managers]: 'You folks in middle-market equipment financing can grow at least 20% this year'—and let them find themselves in the world. That is the difference between us and other financial institutions."
The goals Wendt sets are not modest: GE's consolidated financial insurance group has been told to increase earnings 90% in 1997. "If I committed to 25%, I'd go home at 4:30 p.m.," says Michael Fraizer. "If I commit to this number [90%], I've got to be creative."
GE Capital's president, Denis Nayden, and Wendt talked with Forbes about some of their more promising businesses. One has been spawned by its Financial Guaranty Insurance Company Group, which guarantees interest on municipal bonds. This is a slow-growth business, but GE Capital uses it as a door-opener to state and local governments. The new unit helps these governments find insurance, bill and collect taxes and manage money. GE Capital figures it can get a big chunk of the $1 trillion that local governments spend.
Taking advantage of a market in turmoil, GE is also entering the dead-beat business—lending to less-than-good credit risks. Most lenders in this segment are running for cover or headed for the rocks (Forbes, July 15, 1996). But GE Capital is attracted by the wide spreads between its low cost of borrowing and what it can charge these poor credit risks.
For much of its history GE Capital had an advantage over many rival moneylenders: It could borrow more cheaply than they could, piggybacking on the parent company's AAA credit rating. This advantage has dwindled somewhat. "Securitization is making capital available to everybody at about the same price we get it," grouses Wendt. But GE Capital hopes to avoid any profit squeeze by moving deeper into specialty areas, such as logistics management and medical systems financing, where margins are higher.
"We try hard not to finance straight, basic stuff," says Wendt. "Instead of just leasing a van, we'll bring it to you, give it new tires, and drop it off in Portland. Sure, we'll charge you a little more, [but] it's the push toward service—and we don't just mean being friendly."
The search for new financing products has made GE Capital a frequent acquirer. "GE Capital's official lie," says Nicholas Heymann, an analyst at NatWest Securities, "is that 80% of its growth will be internal and the rest from acquisition." Heymann points out that GE Capital has actually bought its way into some of its growth markets. In 1993, for example, it had just one annuity product, distributed through banks, and $525 million in deposits. Last year, after 9 acquisitions, costing $6 billion, it has 14 major annuity products, 13 distribution channels and $5.2 billion in deposits. In 1996 alone, GE Capital made 44 acquisitions, costing $16 billion.
In case you haven't noticed, all this gives GE Capital yet another advantage. While financial stocks have been hot the past couple of years, they still trail the market in price/earnings valuations. (J.P. Morgan and Citicorp sell at 12 to 14 times earnings.) Because GE Capital provides services in addition to financing, it is seen as having some of the characteristics of management consulting firms, which trade at much higher multiples. For that reason and because it is backed by GE, GE Capital's financial earnings are capitalized in the market at an estimated 16 times earnings, says NatWest's Heymann. |
