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In 2003, we announced three transformational moves: Amersham, NBC Universal, and Genworth. Each of these moves addresses our future in a different way.
We agreed to acquire Amersham for about $10 billion, extending our Medical Systems business into diagnostic pharmaceuticals and life sciences. The addition of Amersham will create a $15 billion Healthcare business in 2005, up from $4 billion in 1996. Our traditional leadership in diagnostic imaging, services and healthcare information technology has long been supported by an excellent leadership team with a strong reputation among our customers. Now, with Amersham’s Sir William Castell, our Joe Hogan, and their teams, we will have the talent in place to develop an extraordinary new era in medicine.
The context of healthcare is compelling. In the emerging era of biotechnology, advanced diagnostics and targeted therapies are moving to the forefront of healthcare delivery. The combination of our imaging technology and Amersham’s pharmaceutical biomarkers will allow us to uncover genetic tendencies toward diseases such as breast cancer or Alzheimer’s; the combination of our high-tech services and Amersham’s drug discovery business opens up new ways to support pharmaceutical customers; the combination of our healthcare information technology with Amersham’s predictive therapeutic capabilities builds a bridge to personalized medicine. The combination of Medical Systems with Amersham will make GE the most comprehensive diagnostic company in healthcare and create the potential for decades of profitable growth.
The merger of NBC with Vivendi Universal Entertainment (VUE) will create a media company positioned for a digital future. Over the years, we have built a strong NBC franchise. However, broadcast television will be impacted by changes in entertainment technology and distribution, and we felt that NBC could not stand still. VUE adds tremendous assets to NBC, including great content, attractive cable services, a leading film studio, diversified revenue streams and an excellent management team.
We structured an effective deal for our investors and Vivendi’s. NBC Universal, as the venture will be called, builds on the value we have created in NBC and requires a limited amount of upfront consideration—$5.5 billion compared to a $14 billion value for VUE’s assets. Our partner expects to realize a potentially greater value as NBC Universal performs over time. Bob Wright is a proven industry leader and has a strong team in place. Bob has a track record of creating tremendous value for GE investors. He and his team will do the same with NBC Universal.
Under the leadership of Dennis Dammerman, we began the disposition of a substantial portion of our insurance businesses in 2003. We freed up $4.5 billion of cash through the sales of Financial Guaranty Insurance Company, GE Edison Life in Japan and our auto insurance business, and we began the process for an initial public offering of our principal life and mortgage insurance businesses through a new company called Genworth Financial. We plan to sell 30% in the IPO and expect to sell down our stake in the next few years. These actions will reduce our investment in insurance by 65%.
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As of January 1, 2004, GE has reorganized its 13 businesses into 11 focused on markets and customers—seven Growth Engines, which generate about 85% of earnings and are market leaders with strengths in technology,
cost, services, global distribution and capital efficiency; and four Cash Generators, which consistently generate
strong cash flow and grow earnings in an expanding economy.
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This chart reflects the most significant changes: the combination of Aircraft Engines and Rail into GE Transportation;
the combination of Industrial Systems and Consumer Products into Consumer & Industrial, with portions of Industrial Systems
moving to other businesses; and the formation of Infrastructure from portions of Industrial Systems and Specialty Materials.
Results for 2003 in this annual report are reported on the 13-business basis in effect in 2003.
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The board and I are not selling insurance businesses out of frustration at their operating performance. Insurance is simply not the right business for us in the future. It requires significant capital to grow, and it does not fully leverage GE’s capabilities. We decided that Genworth will be far better off as an independent insurance business. With Mike Fraizer leading one of the best teams in the industry, and with direct access to the capital markets, I believe that Genworth can win.
2003 was the biggest acquisition year in our history, with total commitments exceeding $30 billion. We made some big bets and we made them with confidence. We know Amersham and VUE. We operate in their markets. They mesh with our core capabilities, and we will integrate them with excellence. I have assigned vice presidents to lead integration teams totaling more than 100 people, one-third of whom are internal auditors.
We make these investments with your indulgence and we owe you a solid return. Both deals should be accretive to earnings and returns on capital by 2005. Amersham and VUE both have strong cash flow, and we can quickly generate substantial additional cash through earnings growth, working capital improvements and low reinvestment requirements. We are experienced dealmakers and operators. Both skills are needed to drive growth.
To take advantage of changing trends, we reorganized ourselves around our markets and customers. As you can see in the chart above, we view GE businesses in two groups: Growth Engines and Cash Generators. The Growth Engines represent about 85% of GE’s earnings; they can grow 15% annually through the cycles with high returns. They are market leaders with great strengths in technology, cost, services, global distribution and capital efficiency. Over the past five years, the average earnings growth of this group is 20%. Our Cash Generators represent about 15% of GE’s earnings. These businesses are more cyclical, but in an expanding economy, they should have double-digit earnings growth. More important, they will have consistently strong cash flow.
We have created an integrated set of businesses that can achieve our financial goals. Many companies would die to have any one of these businesses. We’ve got them all.
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