Profit and Shareholder Wealth: Ge and Tyco

Today’s companies take many forms. One of the ways a company can ensure its success is to diversify its holdings. General Electric and Tyco International are two such companies that have done just that, although they have taken different approaches to achieve their growth. General Electric has taken a more conservative, methodical approach to the industries where its businesses are located. Tyco has taken a more aggressive approach by multiple acquisitions.

These types of companies are called conglomerates. For the purpose of this paper the common shareholder’s equity, market capitalization and net profit margins for the last five years will be discussed. General Electric has been contributing to our country and culture in one way or another since the beginning of the last century. The company was originally named the Edison General Electric Company, and when it merged with the Thomson-Houston Company in 1892 it was renamed the General Electric.

What essentially began in a barn in 1900 with the first lab at GE has grown the company to a point where it is the stock to watch for 2008. Under Charles Steinmetz, GE’s chief engineer, it began years of innovation that still continues. Today, GE Global Research consists of 2,500 employees working in four state-of-the-art facilities: Niskayuna, New York (a few miles from the original barn), Bangalore, India (opened in September 2000), Shanghai, China (opened in October, 2003), and Munich, Germany (opened in June, 2004).

(about GE, 2008) GE’s leaders through the years have built a diverse portfolio of leading businesses; a stream of powerful company-wide initiatives that drives growth and reduces cost; financial strength and Controllership that allow it to capitalize on opportunities through numerous cycles; and a set of common values that allows it to face any environment with confidence (about GE, 2008). GE’s growth strategy outlined in 2003 focuses on five key areas to create high-margin, capital-efficient growth.

These areas are technical leadership, services, customer focus, globalization and growth patterns (about GE, 2008). Tyco came from slightly different roots. It was founded in 1960 by Arthur Rosenberg, Ph. D. when he opened a laboratory to do experimental work for the government. He incorporated the business as Tyco Laboratories in 1962 and changed its focus to high-tech materials science and energy conversion products for the commercial sector. The company went public in 1964. By 1973 stockholder’s equity and consolidated sales had reached 34 million and 13 million respectively.

By 1982, the company had become even bigger and more diverse. (about Tyco, 2008) This was mostly due to several acquisitions, including Simplex Technologies, Grinnell Fire Technologies, Armin Plastics and Ludlow Corporation. In 2006, Tyco split into three publicly traded companies; Tyco Healthcare, Tyco Electronics and Tyco Fire & Security. Tyco’s strategy and leadership evolve in response to its changing market conditions, and the company’s mission and values are enduring (about Tyco, 2008).

Tyco believes that good governance requires not only an effective set of specific practices but also a culture of responsibility throughout the firm, and governance at Tyco is intended to optimize both (about Tyco, 2008) For comparative purposes, GE’s and Tyco’s financial statements have been analyzed. To determine which of these companies had a strategy that was more profitable, ratios and profit margins were examined. When determining the value of a company, a market-to-book ratio is often used to provide a measure of shareholder wealth.

This can be achieved by dividing a company’s market capitalization by the company’s shareholder’s equity. To complete this calculation, the market capitalization must first be determined. This is achieved by multiply the outstanding common stock shares by the current stock price. In GE’s case, the outstanding common stock shares are 669,000; multiply that by the current stock price of 32. 51 as of 5/14/08 and the market capitalization is $21,749,190 million. By this calculation, the market-to-book ratio would be . 1882 (21,749,190/115,559,000).

In Tyco’s case, the outstanding common stock shares are 397,000,000 and the current stock price is 45. 74 as of 5/14/08. The market capitalization for Tyco would be $18,158,780,000. The market-to-book ratio for Tyco would then be . 0219 (397,000,000/18,158,780,000). The comparison shows that although Tyco had a larger market capitalization, GE actually had a larger shareholder wealth for the period ending in 2007. The average net profit margin is another determinant of how well a company is doing. The average net profit margin is determined by dividing the net income by the amount of sales.

For the purpose of this paper, a five-year average will be taken. For Tyco, data from the years 2003-2007 have been used. For 2003, Tyco had 2. 66% (979. 6/36,801), for 2004 it was 7. 5% (2879/38,411), for 2005 it was 7. 68% (3019/39,305), for 2006 it was 20. 71% (3590/17,336) and for 2007 it was -9. 27% (-1742/18,781). This makes the average net profit margin 5. 87% for Tyco. For GE, data from the same years will be used. For 2007, GE had 12. 86% (22,208/172,738), for 2006 it was 13. 66% (20,742/151843), for 2005 it was 12. 24% (16,720/136,580), for 2004 it was 12.

78% (17,160/134,291) and for 2003 it was 13. 74% (15,561/113,241). This makes the average net profit margin 13. 06% for GE. According to these numbers, it appears that GE did a better job of maximizing its profits. This difference in numbers may be related to the amount of debt each company has. GE also had a larger shareholder wealth maximization. Although both companies have achieved substantial growth in the last few decades, it appears that Tyco’s strategy of multiple acquisitions may have presented a greater risk to the shareholders.

This may be due to the amount of money involved in making acquisitions, including legal fees. References About GE from the GE website, retrieved on May 13, 2008 from http://www. ge. com/company/history/edison. html Stockholder’s equity of GE, retrieved on May 14, 2008 from http://money. cnn. com/magazines/fortune/fortune500/2008/snapshots/170. html Income statement GE retrieved on May 14, 2008 from http://stocks. us. reuters. com/stocks/incomeStatement. asp? period=A