General Electric: The Siemens Side Of Change

In the eighties and nineties, I had the pleasure of collaborating with academia in the area of organizational change including on, Research on the Management of Innovation: The Minnesota Studies, edited by Andy Van de Ven, Hal Angle, and Scott Poole. These scholars were working to determine what differentiates organizations that succeed at change from those that don’t. Their research extended into mergers and acquisitions and later into guidance articles for would-be acquirers.

The Dark Side of Change

One morning, a Minnesota Studies participant called to see if I had read his latest article on M&A before he submitted it for publication. I was in a grumpy mood and snapped that I had grown tired of such self-help articles. “David”, I explained, “At two-thirds, the failure rate of M&A’s has been constant for almost 100 years. There is no learning going on here; what makes you think executives care?” My friend was taken aback and challenged, “Well then, what do you suggest, Henry?” On a roll, I blurted out, “Why don’t we research if/how competitors take advantage of rival mergers and acquisitions?” He fell silent before saying, “I’ll call you back.”

Later that day, my phone rang again. It was Drs. David Bastien and Todd Hostager on a conference call. David asked me to repeat my rant. Todd was excited. David jumped in, “Do you have data?” I replied, “I can get them through the Fed’s Call Report database.” [Financial information on banks is public and back then a lot were acquiring and merging or subject to the competitive forces of those that were.]

In 1996, The Journal of Management Inquiry accepted an article that the three of us coauthored under David Bastien’s lead. For reasons extending beyond M&A, we entitled it, “Corporate Judo – Exploiting the Dark Side of Change when Competitors Merge, Acquire, Downsize, or Restructure”. For those unaware of it, unlike the commercial press, scholarly publications primarily source their revenue from subscriptions and reprints. In preparing this article for Seeking Alpha, I reached out to Sage Publications for permission to provide an open-link to that article. I want to thank Sage here for their willingness to do so; very classy. [In the link, click on “Vol 5, Issue 3, 1996” and scroll down to open the article.]

The piece was well researched with extensive citations and went into a great deal of detail about organizational dynamics during times of change. We provided an example of a competitor that grew spectacularly when their rival overreached on an M&A integration, and we offered some prescriptions for success. The concepts landed us on television, the cover of the business section of USA Today, various regional newspapers, and in marketing and trade journals. We also drew some criticism including from Michael Hitt and Roy Serpa; we swatted it away.

The topic had been whispered about but never explored openly for the reason, we speculated, that business people did not want it known that they would resort to such tactics even though some did. The practice of taking advantage of a competitor’s disarray is best not broadcast. Commandeering clients and employees through advertising, direct mail, promotional pricing, and/or coffee house conversations is done but subtly to the extent possible.

The Wounded General Electric

General Electric (GE) is a company living on the dark side of change: a) years of poor board leadership and disrupting executive successions, b) once strong business units struggling to get on their feet, c) SEC and DOJ investigations, d) ratings downgrades, commercial paper questions, e) dividend cuts, f) stock price target downgrades, g) an embarrassment to shareholders, h) stock dumping. Interesting that GE a few days ago took the position that they are a “fundamentally strong company”; they aren’t…

Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018
Revenue $31 bil. $32 bil. $29 bil. $30 bil. $30 bil.
Net Income $1 bil. ($10 bil.) ($1 bil.) $1 bil. ($23 bil.)
Change in Cash ($9 bil.) ($6 bil.) ($12 bil.) ($16 bil.) ($17 bil.)
Equity $76 bil. $56 bil. $56 bil. $55 bil. $31 bil.

Then There Is Siemens

…and, no doubt, some of their customers, employees, partners, and competitors have noticed. Flash back to 2016 when the company was thought to have overpaid for the French multinational Alstom (OTCPK:ALSMY) only to have the DOJ require them to divest some of their power interests. Enter Siemens (OTCPK:SIEGY) that is now working to merge their locomotive business with Alstom’s; no trivial matter especially in the EU.

Meanwhile, GE is positioning to change even more by shedding other once strategic assets, including part of its stake in Baker Hughes (BHGE) and its health care business. Charlie Gasparino, often believed to be “in the know”, says that the company is working on a plan to deleverage including in consultation with Goldman Sachs (GS), JPMorgan Chase (JPM), and Blackstone (BX).

As for Siemens, well, they’ve already spun off their health care business into Siemens Healthineers (OTCPK:SMMNY) while retaining an 85% stake in the company. All the while, they continue to play offense with high-resolution ultrasound, a new mammography system, in vitro and smartphone analyzers, and the nonstop introduction of other exciting technologies.

GE has recently said that it will focus on aviation, power plants, and renewable energy. The company is probably uncatchable in jet engines and related turbine technologies. However, things may not come as easily in other areas. Just recently, for example, GE was included by Iraq in their major electrical infrastructure project but “only after intervention from the White House”; Siemens got the bulk of that work. And, with their stake in Gamesa (OTCPK:GCTAY), the German giant is pulling away from GE in wind as well as, probably, solar with their micro-grid initiatives. I wrote earlier that Siemens may be positioning to become “the renewable energy integrator“.

I, for one, find Siemens’ strategic structure compelling – a decentralized “fleet of ships”. It aligns the strength of their brand with the realities of a world now demanding focus, agility and adaptation. Siemens’ financials are good enough (for now) with 16 of 26 analysts having SIEGY as a buy with an overall average price target or $73.56, representing potential appreciation of 27% over Friday’s close of $57.93.

Market and Investor What…if’s

But what really holds my interest are two “What…if” questions. What if Siemens begins in earnest to pick up business from GE either outwardly via asset acquisitions, or organically via some of the less obvious tactics mentioned above? And, what if investors catch on such that Siemens’ stock starts to rise inversely to GE’s fall? I’d only add that, to the extent GE’s downsizing helps Siemens become a global oligopolist, they and their shareholders may benefit further. The news and the chart lines below will indicate whether these questions come to fruition.

Chart

GE data by YCharts

In our original research on exploiting the dark side of change, we drew a preliminary conclusion that, a well-orchestrated response to the disruptions that follow from a rival’s restructurings may result in one of the more significant growth events that a competitor ever experiences.

I’m a long, not a short. Having owned and sold GE more than once dating back to 2009, I wish the company well. After all, it was GE that Thomas Edison built 125 years ago and as recently as 2010 was ranked by Forbes as the second largest company in the world. At the same time, though, I have some understanding of the forces that can come into play in situations like this. My money is on Siemens.

Disclosure: I am/we are long SIEGY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Always do your own due diligence in consultation with a licensed and competent financial adviser who understands your unique needs and puts your interests ahead of their own. Remember, there are added considerations in owning foreign securities including those associated with ADR sponsorship, buying and selling the pinks, foreign withholding taxes on dividends, and fees. (All my proceeds from contributing to SA go to charity.)

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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Netflix Subscribers Will Pay Less (Or Possibly More) Depending on Where They Live, According to 2 Surprising Reports. Here Are the Details

It’s releasing 700 new shows this year. Think about that. It’s almost two new shows per day, counting new seasons of existing series.

And it turns out many subscribers absolutely love it. In fact, a new study by a Wall Street firm says a majority of U.S. Netflix users would be willing to pay a lot more for the service –40 percent or more than they currently pay.

That has to be tempting to Netlix, which simultaneously has spent $8 billion to produce and license new shows.

And it’s why the same Wall Street firm, Piper Jaffray, is predicting that Netflix will “bump pricing up across many of its markets in 2019,” according to Business Insider, because a “primary determinant in the ability of Netflix to raise price is subscriber perception of content quality.”

Or to put it a bit more plainly: people like it, so they’re willing to pay more, so you can expect Netflix to charge more.

That makes sense. But the news comes in the context of another report–one that says Netflix is actually playing around with an idea to charge less in other parts of the world.

Last week, a Malaysian news site called The Star Online reported that Netflix was trying a somewhat stripped down, mobile device-only subscription plan that goes for 17 Malaysian ringgit a month–which works out to about $4.25 in U.S. currency, and is less than half what a regular Netflix subscription costs in Malaysia.

Netflix confirmed to TechCrunch and USA Today that it’s running these cheaper, mobile-only subscriptions “in a few countries,” but didn’t provide further details. But it’s in keeping with what CEO Reed Hastings told Bloomberg last week, about want to experiment with different pricing strategies around teh world.

Of course, as Netflix users know, the content that you see in one part of the world isn’t always the same as what you’ll see in other parts of the planet. And Netflix has been emphasizing local content recently in Asia, where it faces stiff competition from lower-priced streaming services.

Besides meaning that Netflix, not Apple or Alphabet, keeps the customer data, it also means Netlix doesn’t have to pay a 15 or 30 percent cut to those companies to reach its own subscribers.

That could free up more opportunity to drive prices down in some markets. But not, analysts predict, in the United States and perhaps other wealthier countries. 

It might literally be a first world problem, but if these analysts’ predictions are right, we’ll likely be paying a bit more before long. Either way, you’ll probably keep watching.

By the way, I contacted Netflix via email to ask them for comment on these reported price fluctuations, but I haven’t heard anything back. If they do reply I’ll update this column. 

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In Just 4 Words, Texas Congressman Dan Crenshaw Taught a  Huge Lesson in Emotional Intelligence

The always edgy Saturday Night Live issued a rare apology this past weekend. Cast member Pete Davidson appeared with disabled veteran and newly elected Texas congressman Dan Crenshaw. Their joint statement crossed the political divide in these polarized times and left pretty much everyone highly impressed. But the most impressive moment came days earlier, on Election night, when Crenshaw responded to a reporter’s question about the joke and showed what true emotional intelligence sounds like.

It all began with a “Weekend Update” sketch on the Saturday before Election Day, when Davidson did a segment called “First Impressions” in which he riffed on supposedly ugly candidates for office. Davidson likes pushing buttons and making people uncomfortable with his comedy so it’s not surprising that many of his assessments could have offended their targets. Take Florida governor and (probable) senator-elect Rick Scott. Davidson had this to say: “He looks like someone tried to whittle Bruce Willis out of a penis.” 

After a few more such comments, a picture of then-candidate Crenshaw appeared. Crenshaw, a Navy SEAL who lost his right eye to an IED in Afghanistan during his third tour of duty, wears a large black eye patch. Davidson said, “You may be surprised to hear he’s a congressional candidate from Texas, and not a hit man in a porno movie.” After giggling at his own joke, he added with a shrug, “I’m sorry, I know he lost his eye in war or whatever,” before going on with the routine.

SNL faced intense criticism for the skit, with former White House press secretary Sean Spicer calling for the firing of not only Davidson but also Lorne Michaels, SNL’s long-time producer. Even those who didn’t believe Davidson should be fired (or perhaps keel-hauled) did think the show should apologize to Crenshaw and wounded vets everywhere. 

Crenshaw himself, however, was specifically not calling for an apology. On Election night, fresh from his win, a local TV reporter asked about the incident. “SEALs don’t get offended,” Crenshaw said. He went on to say more, that even though the comments might have been offensive, “Let’s stop demanding apologies and firings of people. Let’s just demand that comedy actually be funny, but let’s be good people.”   

That first sentence–“SEALs don’t get offended,”–puts the whole event into perfect perspective. When you’ve faced death over and over, when you’ve been through some of the most rigorous training and worked in some of the harshest conditions on the planet, when you’re able to do things most people can’t imagine…a little tasteless comedy from a sickly 24-year-old just isn’t a big deal. Get over it people–we all have more important things to worry about.

Live…from New York…It’s not an apology.

Of course, this is not the first time an Saturday Night Live episode has caused widespread offense. SNL, in general, does not apologize, at least not on the air and not in the usual way. When Sinead O’Connor outraged many catholics by tearing up a photo of the pope, the show’s response came in the form of a monologue by Joe Pesci criticizing O’Connor and saying that if it were his show he would have given her “such a smack.” He then showed the audience the picture, taped back together. Likewise, when Larry David was lambasted for jokes about how to pick up women in a concentration camp, he returned later as Bernie Sanders in a fake ad, ranting about comedians who made fun of the Holocaust and saying they should “rot in hell.”

SNL had never, in anyone’s memory, issued a straightforward apology during the show. But that changed this past Saturday when Davidson again appeared on “Weekend Update.” “In what I’m sure was a huge shock for people who know me, I made a poor choice last week,” he said. “On behalf of the show and myself, I apologize.” He went on: “The man is a war hero and he deserves all the respect in the world, and if any good came of this, maybe it was that for one day, the left and the right finally came together to agree on something–that I’m a dick!” 

“You think?” said Crenshaw, a surprise guest, suddenly entering from Davidson’s right. Davidson apologized directly to Crenshaw, who accepted the apology. There was some joking around about Davidson’s ex-fiancée Ariana Grande and a bit of business in which Crenshaw got his own back by making several jokes based on Davidson’s appearance. 

And then Crenshaw turned serious. There was a lot to learn from the incident, he said, not just that the left and the right could agree sometimes, but also that Americans can forgive each other and see the good in one another. He went on to mention Veteran’s Day the following day. “It’s a good time for every American to connect with a veteran, maybe say ‘Thanks for your service.'” But, he went on, “I would actually encourage you to say something else. Tell a veteran, ‘Never forget.’ When you say ‘never forget’ to a veteran, you are implying that as an American you are in it with them, not separated by some imaginary barrier between civilians and veterans but connected together as grateful fellow Americans.”

You’re also letting them know that you’ll never forget those past and present who gave their efforts, their health, or their lives, Crenshaw said. That included Davidson’s father, a firefighter who died in the Marriott World Trade Center on 9/11–the loss left Davidson badly bereft. So, Crenshaw said, turning to Davidson, “I’ll just say, Pete, never forget.”

“Never forget,” Davidson answered, shaking Crenshaw’s hand. Then he turned toward the audience and shouted, “And that is from both of us!”

It was a rare moment of serious emotion in a show that prides itself on avoiding anything like that. And an equally rare example of what we can accomplish when we set aside the outrage and the posturing and treat each other with compassion and goodwill and the sense that, after all, we really are all in it together.

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Walmart India venture Flipkart loses CEO to misconduct probe

(Reuters) – The head of Walmart Inc’s (WMT.N) Indian venture Flipkart Group, Binny Bansal, has resigned following a probe into “serious personal misconduct”, a shock to the U.S. retailer’s efforts to compete with Amazon in India’s huge consumer market.

FILE PHOTO – Binny Bansal, Group Chief Executive Officer of India’s largest e-commerce firm Flipkart, poses at the company’s headquarters in Bengaluru, India July 7, 2017. REUTERS/Abhishek N. Chinnappa

Bansal, 37 and one of the most high profile of India’s new generation of young, tech-savvy billionaires, has strongly denied the allegations, Walmart said.

Kalyan Krishnamurthy, who heads the company’s main Flipkart e-commerce operation, would now act as chief executive for a broader group of businesses including apparel websites Myntra and Jabong, the company said.

Neither Bansal, who has been chief executive of the Flipkart Group since January of last year, nor his representatives could be reached for comment.

“While the investigation did not find evidence to corroborate the complainant’s assertions against Binny, it did reveal other lapses in judgment, particularly a lack of transparency, related to how Binny responded to the situation,” the company said.

“Because of this, we have accepted his decision to resign.”

Since Walmart paid $16 billion for a roughly 77-percent stake in Flipkart in May, Indian media have speculated Walmart was planning changes at India’s biggest online shopping platform as it strives to compete with Amazon (AMZN.O).

The U.S. big box retailer has said already that it may float Flipkart publicly within the next four years and Bansal’s departure follows that of co-founder and former Amazon colleague Sachin Bansal, who left when the deal was sealed.

Walmart said Binny Bansal had been contemplating a transition for some time and that the companies had been working together on a succession plan, which had now been accelerated.

Ananth Narayanan, who is the CEO of Myntra and Jabong will continue in those roles and will now report to Krishnamurthy.

“This certainly is a hiccup,” said Harish Bijoor, an industry consultant based in Bengaluru.

“(It) raises the question of what plans are ahead for Flipkart. The path the company will take will have a trajectory which is controlled by new investors.”

The Indian investment is the U.S. retailer’s largest-ever acquisition and was a major move in its efforts to oppose Amazon at home and abroad, where it has been struggling.

The website that began as an online bookstore now sells consumer goods ranging from soaps to smartphones and clothes and is the largest e-commerce player in an Indian e-commerce market that could be worth $200 billion within a decade.

Its divisions include Flipkart, Myntra, Jabong and payments app PhonePe.

Reporting by Siddharth Cavale and Nivedita Balu in Bengaluru; Editing by Patrick Graham

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