GE's successful strategy called risky

Critic says company uses cheap financing to buy firms, boost bottom line


William H. Gross, a widely respected bond fund manager, sharply criticized General Electric Co. yesterday, saying that GE is using acquisitions to drive its growth rate and is relying too much on short-term financing.

Gross, manager of the $52 billion Pimco Total Return mutual fund, the world's largest bond fund, said that GE's strategy was similar to a tactic used by failed conglomerates in the 1960s, such as LTV Corp.

Pacific Investment Management Co., his fund group, would no longer buy short-term GE debt, he said.

In a tart commentary published yesterday, Gross faulted GE for making acquisitions with commercial paper, an inexpensive form of short-term financing used by big companies.

Because GE's cost of capital is so low, the company can easily add to its profits by making acquisitions whose earnings outstrip its interest costs, Gross said.

Though the strategy appears promising in the short run, it increases the risks for GE investors in the long run, he said.

If interest rates rise or GE loses access to the commercial paper market, the company could wind up paying much more in interest, sharply cutting its profits.

Keith S. Sherin, GE's chief financial officer, said last night that the company is moving to rely less on commercial paper. Sherin also said that acquisitions accounted for about 15 percent of the profit growth that GE posted last year and that the company would disclose the contribution acquisitions make to its growth in future annual reports.

GE shares fell $1.10, or 2.7 percent, to $38.80 yesterday as the stock market generally lost ground. The company has a market capitalization of almost $390 billion, the largest in the world.

"GE is a conglomerate financed by a money machine," Gross wrote. "It grows earnings not so much by the brilliance of management or the diversity of their operations, as Welch and Immelt claim, but through the acquisition of companies."

He referred to Jack Welch, GE's chief executive since 1981, and Jeffrey R. Immelt, who replaced Welch in September.

Much of the growth that GE has reported for the past several years has come not from sales gains in existing businesses, but from the purchase of other businesses and the consolidation of those unit's results with its own, Gross said.

Sherin said the acquisitions made by GE last year increased the company's profit by $200 million, while the company's total year-over-year profit growth was $1.2 billion on net income of $14.5 billion. "We disclose every acquisition we make," he said.

Gross criticized GE's reliance on commercial paper, the short-term securities floated directly to big investors. At the end of 2001, the company had $117 billion in commercial paper outstanding, and $44 billion in other short-term loans, said Marissa Moretti, a GE spokeswoman.

But GE does not have lines of credit from banks to back all its commercial paper should it for some reason lose access to that market, Gross wrote.

About $33 billion in GE commercial paper is supported by credit lines. As a result, should GE face problems in refinancing its commercial paper, it might have to pay much higher interest rates to get credit.

"The permanency of their cheap financing is not secure," Gross said in an interview. In addition to running the Total Return fund, he is chief investment officer for the Pacific Investment Management Co., which manages $260 billion. In 1998 and 2000, Gross was named the bond fund manager of the year by Morningstar, a stock and fund rating agency.

For the past three years, the company has used commercial paper for almost half its financing needs, Sherin said. By the end of this year, it expects to reduce that portion to less than 35 percent, he said.

Gross also complained that GE is not forthright with investors.

Last week, when GE sold $11 billion in three-year, five-year and 30-year bonds, a spokeswoman for the company told The Wall Street Journal that it was making the offering because interest rates are "at historic lows."

In fact, rates are more than 1 percent higher than they were a few months ago, Gross said.

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