Peter Spasov interviews Robert Duffy, VP of Global Business Development at GE, on corporate M&A

On Thursday, January 26, 2012, Robert Duffy, Vice President, Global Business Development, General Electric, and Peter Spasov, Partner, Marlin Equity Partners, discussed the challenges and advantages of corporate M&A and how the right transaction can create and add value within a large organization. They also addressed the current and future state of the global market and navigating the market from both the buy and sell sides.


PETER SPASOV: Can you briefly walk me through your background and the group you lead at GE?

ROBERT DUFFY:  I’m the vice president of the corporate business development (BD) group at General Electric. We’re a group of about a dozen people, and we are responsible for M&A and strategy across the company. We also have BD teams in each of the major businesses, including healthcare, energy and aviation.I’ve been at General Electric for nine years. I started in investment banking and did M&A for 15 years, both in the U.S. and Europe, and then came to GE in 2003. I was attracted by the opportunity to work with a company that was going through a fundamental portfolio transformation.

What are the major differences between working in investment banking and leading corporate M&A for a large conglomerate?

There are a couple of differences. One is that, as the principal, you’re starting with a strategy much earlier in the process, so the way we come up with M&A ideas is through working with businesses to identify strategic gaps, figuring out if it’s an organic or inorganic problem and then finding solutions that fit. The other thing that’s different is that banking is very much a transactional business. You move from deal to deal. You develop relationships, but you’re really looking for that next transaction. On the industrial side, you spend a lot more time trying to fix a problem, so the gestation and discussion can extend over multiple years. And even after you’ve done the deal, you have to work to integrate it and get it working well, and delivering on that can take a couple more years. So it has a much longer time horizon, which is one of the aspects of in-house work that I find attractive.

Prior to joining Marlin Equity in 2005, I worked at Northrop Grumman. During my six years there, Northrop was on a significant acquisition spree and became the largest pure-play defense company. As the company grew larger, it became clear that the incremental value added from each additional acquisition was diminishing. Can you talk a little about how to create and/or add value within a large and global organization such as GE?

It has its positives and negatives. The issue you’ve highlighted in your own experience is true at GE as well. There’s no one deal we’ll do that will change the direction of the share price overnight. We have a market cap of about $200 billion. When we do transactions, our sweet spot is really $500 million to $3 billion; the number of deals we’ve done over $4 billion is less than a dozen. So, normally, the big deals we do are $3 billion deals that are focused on building out an existing business. From the shareholder’s perspective, you may not necessarily see the value, although you might feel it a little. But from the business perspective, it can be a very transformative deal. The first deal I worked on was NBC’s acquisition of Universal in 2004, which was one of the bigger deals at GE. That was a transformative deal for NBC because they were a broadcast network with a little bit of cable and Universal was a film and cable business that was really dependent on ad revenue. So we bought Universal and made it a much more content-driven business. We integrated the cable revenues into the business, and our broadcast business at the time provided about a billion dollars of profitability over the course of the next eight years, and the profitability of the ratings in the ad market went to close to zero. If we hadn’t done the deal, we would have had a very damaged entertainment business. Instead, we were able to sell last year for $30 billion dollars and create some real value for our shareholders. Did they feel that when we bought and sold it? Not necessarily. But did the company benefit from those transactions? It did.

The advantage I have at General Electric, especially in the seat in which I sit, is that the overall company is huge. I look over a variety of businesses, and the businesses we have are large for their sectors. So any one deal is not going to sink the company, and that gives us a little more flexibility than some of our peers. While there is still M&A that can be transformative for the businesses with which we deal, private equity can take a portfolio approach. And if they miss once in a while, it’s okay. We don’t look at it exactly like that at GE, but given our size, we are able to be a little more aggressive on some potential opportunities than others are. Hopefully, if we make the right decisions in the long run, those will win out.

Given that GE is large conglomerate with diverse product lines and segments, how does your team approach decision making and strategy for each of these specific divisions? Are the business leaders in those segments driving strategy from an acquisition standpoint, or is it more of a top-down organization?

It’s both, but I would say that most of our strategies are really driven from the bottom-up. We have a rigorous yearly planning process where we go through a long-term strategic overview of the businesses that ultimately reports up to the board of directors. That process has evolved over time, and today it’s really focused on what’s going on in the industry, what technology changes are coming and how to deal with them. The businesses are more responsible for identifying those strategy challenges. What our CEO and the corporate team do is drive them to think about what’s changing in the market as a whole and how we’re going to deal with that.

One example of a top-down initiative we’ve pursued is in emerging global markets. Like everyone else, GE has tried to do joint ventures in China and acquisitions in Latin America. We did a couple of those, but they have a hit-and-miss record. So, starting five years ago, we created an M&A corporate center of excellence in China and hired about two dozen people to do M&A over there. As M&A practitioners, they have a few responsibilities. One is to help get deals done. The second is to help develop market relationships and understand what’s in the market. Our thinking was that by having a team in the market full-time, we’d be able to create a better understanding of and presence in the market and a faster ability to get things done. The third part of what they do is market the opportunities in China to the businesses so that the businesses understand that if their headquarters are in the U.K. or the U.S., they still have somebody on the ground that they can talk to. And we have business teams there to discuss what their opportunities are as well. We’ve taken that model and have rolled it into Brazil now, and we’re putting it in other areas around the world as well to develop a more visible and vibrant presence in those growing markets.

What businesses within GE’s portfolio do you believe have the best potential for meaningful growth?

We think we have a pretty attractive portfolio overall. Our largest business is energy, which includes electricity generation, transmission and distribution as well as oil and gas development. When you think about growth in emerging markets, it’s about the lower class becoming middle class, and as that happens, the demand for electricity and gasoline goes up. And as an economy develops, people travel more and will need airplanes to do that. And we’re in aviation. So they’ll need more of all the things we sell, and we feel very good about that business model. We also have healthcare, which is the next real challenge for all of us today—more efficient healthcare with better cancer treatment, life sciences and diagnostics. And then we have a capital business that helps to support all of the above going forward.

What are the key trends that you expect to see in 2012?

It’s going to be a tough year. From a macro perspective, the U.S. and emerging markets are both probably going to be a lot like they were in 2011 with growth that’s not at boom levels, but still pretty good. Europe is a question mark. There’s a real risk there, and we’re planning for a negative—but not abysmal—European market environment. Our hope is that we’ll be pleasantly surprised.

From an M&A perspective, I think we’ll still see a lot of activity. People currently have a lot of cash that they want to deploy. There’s a need for growth, and one of the ways you grow in a slow-growing economy is to buy companies that you can integrate. And there’s still a strong demand to get bigger in emerging markets, which will drive a fair amount of activity. There will probably be more joint ventures than acquisitions, but I think we’ll see a lot more activity as people start to understand those markets better. They’re finding different ways of doing business.

My firm, Marlin Equity, has been recognized as the most active acquirer of companies through corporate divestitures since 2009, and lately, we have noticed a real uptick in divestiture opportunities. In this slow growth environment, what are GE’s divestiture goals and objectives?

We have a track record of doing a fair amount of divestitures. We did around $60 billion to $70 billion of divestitures over the last ten years. We’ve sold some big businesses and some small businesses, and it was more driven by getting the right portfolio than anything else. So it’s been a business mix. Going forward, we’ll still probably do a healthy level of divestitures—although not as big as we have in the past—and a lot of that will be driven by trying to hone in on our core. We’ve also done a lot of acquisitions, and we’ve bought in such a way that we have what we want and don’t have the things that are a little less core. I think it’s a healthy part of running a big portfolio. Even with a company as big and healthy as we are, we don’t have all the resources that every business needs to grow. There are different owners who can make better use of some of the assets we have, and that’s a good reason to divest them.

Have you considered joint ventures or structured partnerships for underperforming or slow growth business units that you still believe in?

We’ve looked at joint ventures as an exit in the past, but it’s less attractive to us as a company. When we look at the private equity side, we don’t want to put leverage on entities that we don’t control because, being who we are, there will ultimately be some recourse back to us. That’s a hard thing to structurally make work for General Electric. But we do see joint ventures as a way to exit businesses that are more strategic to another corporate partner, and we’re more likely to do a joint venture with a corporate partner as an exit strategy when there’s some synergy value and restructuring that’s mutually beneficial.

Can you highlight some of the challenges that you frequently encounter when buying and selling businesses?

This is a funny market to be in right now. Nobody feels great about it, but most people feel pretty good about what they have. If you’re a buyer and have cash, you expect that if the market doesn’t feel great, you should be able to find things. But in reality, it’s hard to find those things, and when you find them, the pricing seems pretty aggressive. So it’s tough in that way. And then everybody is struggling with how to grow in emerging markets and how to get those deals done, and the time and energy it takes to get those deals done—with the number of false starts, restructurings of deals and revisiting of settlements—is always frustrating. But it’s just the way you have to do it. For us and a lot of other people, there’s a lot of optimism about how things are ultimately going to turn out, but there’s also a little frustration about the pace at which we’re getting through this. The one thing I keep taking away from those conversations is that most businesses are fairly healthy—maybe not growing as much as before, but healthy—and that’s encouraging.

What are the factors that you consider when deciding whether to sell a business?

We make the decision to sell when a couple of aspects of the business and market are right. First, we need to believe that there are interested buyers. You don’t want to start a sale and not have buyers. We also make the decision to sell either when we feel that the business is showing its true value—that is, after addressing any issues that need to be fixed—or if we think that we’re not going to be doing what the business needs in the next couple of years. With the latter, we decide to sell it before it becomes an issue.

With most businesses we sell, we’ve already been looking at it for a couple of years and have had the discussion about whether it’s a grow for us and if it’s something we want to keep. That might take a little time to resolve. And then it’s a fix-or-sell discussion that might go back and forth for 18 to 24 months. After that, it’s really just a question of market conditions, and I think we’re coming to a point in the market where it’s a pretty good time to be a seller. There’s a lot of pent-up demand for assets right now.

Do you typically manage divestiture processes internally, or do you hire investment banks?

We work with investment banks. We find them helpful in making sure that we’ve got the right set of buyers. They’re also helpful in communicating with those buyers. We like to have the primary negotiations directly, but I think bankers serve a purpose in understanding who else is in the market and if there is another channel of communication with the buyer. That can sometimes be very helpful in gaining a better understanding of the buyer’s decision-making process and what the real issues are. It’s sometimes hard to get clear information even in a one-on-one conversation.

In closing, do you have any advice for other M&A professionals within large corporations?

I would say that we do our best deals when we’re as closely linked to our business leaders as possible. I think it’s largely about understanding what’s going on in the markets and what is a strategic move. It’s important to be honest about that and not let the fact that something is available sway you if it’s not strategic. If it’s not strategic and not something of which you’re really going to take advantage, you don’t want to invest the time, energy and capital in acquiring those assets. In hindsight, we’ve walked away from a lot of deals that we felt pretty good about because we struggled to understand how it was going to help us strategically.