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Financial Analysis of Universal Studios

Financial Analysis of Universal Studios

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Financial Analysis of Universal Studios
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Netra Shetty
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Financial Analysis of Universal Studios - February 15th, 2011

Universal Pictures (sometimes called Universal City Studios or Universal Studios for short), a subsidiary of NBCUniversal, is one of the six major movie studios.
Founded in 1912 by Carl Laemmle,[1] it is one of the oldest American movie studios still in continuous production. On May 11, 2004, the controlling stake in the company was sold by Vivendi Universal to General Electric, parent of NBC.[2] The resulting media super-conglomerate was renamed NBC Universal, while Universal Studios Inc. remained the name of the production subsidiary. In addition to owning a sizable film library spanning the earliest decades of cinema to more contemporary works, it also owns a sizable collection of TV shows through its subsidiary NBC Universal Television Distribution. It also acquired rights to several prominent filmmakers' works originally released by other studios through its subsidiaries over the years.
Its production studios are at 100 Universal City Plaza Drive in Universal City, California. Distribution and other corporate offices are in New York City. Universal Pictures is the second-longest-lived Hollywood studio; Viacom-owned Paramount Pictures is the oldest by a month.

General Electric Co. (NYSE: GE) is a multinational conglomerate that manufactures large-scale industrial products, produces consumer appliances, and provides financial services. GE's operations now span the financial services, energy, industrial manufacturing, healthcare, and media industries. In 2009, GE was the twelfth-largest company in the world by revenue and the eigth-largest company by market capitalization.[1] The company generated $156 billion in revenue in 2009, down 14.1% from $183 billion in 2008.[2] The conglomerate has been hard hit by the financial crisis and slowdown in global demand, earning $11 billion in 2009, down from $17.4 billion in 2008.[2]

GE's diversification provides the company with a degree of protection against poor performance in any business segment. Additionally, GE's size enables it to buy and sell companies at opportune times, taking advantage of favorable market conditions. For example, in December 2008 GE Money sold its Wizard Home Loans brands along with $4 billion in mortgage debt to Aussie Home Loans in an effort to withdraw from the residential mortgage business and limit the company's exposure to the housing crisis. [3] Acquisitions contributed $0.5 billion to net income and $3.4 billion to consolidated revenues in 2009. [4] The company aims to integrate acquired businesses as quickly as possible. GE expects to end 2010 with more than $25 billion in cash from working capital management, the sale of its security businesses, and the sale of its stake in NBC Universal. After buying back Warren Buffet's preferred shares and boosting its dividend, management is looking to purchase companies valued at over $1 billion to add to its portfolio. [5]

Contents
1 Fourth quarter 2010 results
2 NBC Universal Deal
3 Company Overview
4 Trends and Forces
4.1 Maintaining flexibility through acquisitions
4.2 Focus on International Growth
4.3 Sensitivity to U.S. dollar
4.4 Sensitivity to the 2008 Financial Crisis
4.5 Growth through Acquisition and Sales of Underperforming Units
4.6 Environmental Leadership
5 Competition
6 References
General Electric has announced a new overall strategy of focusing on its healthcare, engine, energy, and other core manufacturing businesses instead of its service-oriented businesses like GE Money and NBC Universal.[6] In October 2010, GE Healthcare announced it would be acquiring Clarient (CLRT), a molecular diagnostics firm, for $587 million in cash.[7] The company hopes that the deal will diversify its revenue base and push further into the medical imaging space.

This strategy change comes at the heels of the 2008 Financial Crisis, which has had a sizable effect on GE, since the company usually generates half of its profits from GE Capital Services (GECS), the company's financing arm.[8] General Electric expects commercial real estate losses at GECS to rise to $2.9 billion in 2010 up from $2.1 billion in 2009, with overall losses at GECS peaking in 2010 at $13.6 billion.[9] On March 12, 2009, S&P downgraded GE to a "AA+" credit rating from its long-held "AAA" rating, citing increased uncertainty relating to GE Capital.[10]

Fourth quarter 2010 results
In the fourth quarter of 2010, GE reported a better-than-expected 51% rise in profit and its highest level of new orders since 2007, reflecting a "broader and deeper" economic recovery according to CEO Jeff Immelt. Revenue rose 0.8% to $41.4 billion as profit rose to $4.54 billion (42 cents a share). Immelt said he expects a return to revenue growth in 2011, with an expected range of 0-5%. Orders for big-ticket equipment and services climbed 12% from the year-ago fourth quarter to $24.8 billion. However, earnings were helped by an unexpectedly low tax rate as the sale of NBC Universal was delayed from the fourth quarter into the first quarter of 2011. The company warned the tax rate in Q1 2011 will be unusually high because of gains from the deal close.[11]

NBC Universal Deal
On December 4, 2009, General Electric agreed to give Comcast majority ownership in NBC Universal, the oldest television network in the US.[12] In the deal, Comcast will merge its cable networks and some of its web assets with NBC into a joint venture, paying GE $16.5 billion for a 51% stake in NBC Universal.[12] GE CEO Jeffrey Immelt said the deal will generate about $8 billion in cash to his company at closing.[12] Vivendi agreed to sell its 20% stake in NBC Universal for $5.8 billion.[13] The deal contains provisions that allow both parties to force the purchase of GE's remaining 49% stake through the next seven years at a 20% premium to the public market value, so that Comcast may take full ownership of the company.[12] With the sale of NBC, GE will gain not only a immediate healthy boost in cash of $8-$9 billion but also continue in its strategy of focusing on its core industrial businesses.


The company received regulatory approval for the sale in January 2011. The deal will close in the first quarter of 2011, which will lead to a higher-than-usual tax rate for the company.[14]

Company Overview

General Electric is currently comprised of six distinct divisions.

GE Technology Infrastructure (27% of revenue, 39% of operating profit)[2] develops technologies for transportation infrastructures. This segment includes GE Aviation, which produces and sells jet engines and other parts for military and commercial aircraft. GE Transportation provides technological parts, such as locomotives and engines, to the railroad, marine, and transit industries.[15] GE Water manufactures pumps, filters, and other equipment needed in water treatment and desalination systems. [15]
GE Healthcare [16] is a subunit of GE Technology Infrastructure that offers healthcare and medical-related services and goods. The division manufactures and services a range of medical equipment including CT, PET, MRI, nuclear, and X-ray imaging
GE Energy Infrastructure (24% of revenue, 35% of operating profit)[2] This segment manufactures equipment for energy companies. GE Energy sells energy technologies such as gas turbines, generators, and steam turbines to power companies and industrial plants.[17] GE Oil and Gas supplies equipment such as drilling systems, floating production platforms, compressors, and turbines for the oil and natural gas industry. Oil and Gas is one segment the company would like to expand, aiming to double its revenue to $15 billion by 2014. The company expects Oil and Gas to grow organically by focusing on niches rather than compete with larger rivals Halliburton and Schlumberger N.V. (SLB). [18] In December 2010, GE Oil & Gas announced it would buy Wellstream Holdings, a subsea pipeline manufacturer, for $1.3 billion.[19]
NBC Universal (9.8% of revenue, 12% of operating profit)[2] is one of the four major US broadcast networks and a motion picture studio. The unit includes a portfolio of news and entertainment networks, a motion picture production company, television production operations, and a group of theme parks. GE owns 80% of NBC Universal, and it will acquire the remaining 20% from Vivendi in a deal announced in December 2009.[13] The division's cable/television network includes USA, Bravo, CNBC, the SciFi Channel, MSNBC, Oxygen, the Sundance Channel, UniHD, and others. NBC has exclusive rights to the 2010 and 2012 Olympic Games, NFL Sunday Night Football, and Super Bowl 2009 and 2012. [20] In December 2009, GE announced a deal in which it would give Comcast a 51% stake in NBC Universal, with provisions for Comcast to eventual take full ownership of the media conglomerate.[12]
GE Capital (3.2% of revenue, 12.1% of operating profit)[2] This unit is the umbrella group for all of GE's financial services, and has suffered the most from the 2008 Financial Crisis. The division offers loans and leases for customers needing capital to construct new facilities, purchase new equipment, or acquire new real estate. GE Commercial Finance services the construction, manufacturing, transportation, telecommunications, and healthcare industries. [21] GE Money (14.5% of Revenue)[22] provides consumer banking and credit services, including credit cards, personal loans, bank cards, auto loans, debt consolidation, and home equity loans. GE Money sold its US mortgage business (WMC) in December 2007 as a result of the subprime lending crisis.
GE Consumer & Industrial (6.1% of revenue, 2.1% of operating profit)[2] produces and sells consumer appliances, industrial equipment, and related services. GE Consumer & Industrial manufactures products such as home appliances, industrial equipment, and lighting. GE Enterprise Solutions offers security systems, plant automation, and other large-scale solutions needed by industry.


2008 Revenue by Segment (US$ billions) [23]


General Electric Revenue and Income. [24][25][26]
Trends and Forces

Maintaining flexibility through acquisitions
As a large conglomerate with substantial purchasing power, General Electric employs a strategy of acquiring and selling off companies to maximize revenues at any given time. By using this strategy to enter and exit various industries, GE adjusts its portfolio of offerings in order to take advantage of profitable conditions in any one market or industry. For example, improved fuel efficiency in airplane engines has reduced commercial airlines' operating costs, allowing them to expand their fleet of airplanes. GE has responded to this trend by expanding further into the engine production and airplane leasing businesses, delivering 3030 engines in 2008 compared to 2600 in 2007 with a backlog of 9400 engines as of January 2009.[27] Some notable acquisitions in the past several years include:

NBC Universal
In July 2008, NBC Universal announced plans to acquire The Weather Channel for $3.5 billion.[28] The Weather Channel is the third most popular cable television station, as 97% of cable subscribers have The Weather Channel. [28]
Healthcare
GE's acquisitions of Amersham in 2004 and IDX Systems in 2006, which manufacture products used in health care, have helped expand GE's presence in the industry.[29] [30] Revenues for GE's healthcare segment have since increased from $15.0 billion in 2005 to $17.0 billion in 2007. [23]
Plastic business
GE Supply and Advanced Materials was sold to offset the losses resulting from the price inflation of raw materials, natural gas, and benzene. GE is now reportedly discussing the sale of its plastic business to Saudi Basic Industries Corporation (SABIC) for $11 billion. [31] Unpredictable commodities prices have made it difficult for GE to achieve predicted earnings, driving the company to sell its plastic business. SABIC is 70% owned by the Saudi government, however, which could politicize the issue and present an obstacle to closing the deal. [32]
Insurance
GE has been selling off its insurance businesses in order to concentrate on expanding its other divisions' presence in emerging markets. With the sales of GE Life, GE Insurance Solutions, and Genworth, the company completely exited the insurance business in 2006.[33]


GE Revenue % by Region[34]
Focus on International Growth
GE has been greatly expanding its presence across the world, particularly in emerging markets. International markets often provide higher growth potential, driving GE's push into new geographic regions. One particular area with high potential for international growth is cable and television programming, where GE operates 15 cable and satellite brands operating in over 100 countries.[35] Management hopes to double its cable revenue to $500 million. [35] In October 2009, CEO Jeffrey Immelt said the company may double revenues from India to $6 billion in the next 3-4 years. [36]

Though global expansion offers the possibility for higher revenue growth, there are also some risks involved. Laws and regulations, which differ from country to country, can significantly impact GE's performance. For example, in December of 2006, Japan passed a law that lowered the maximum interest rate lenders (such as GE) can charge and put limits on consumer borrowing.[37] These difficulties lead GE to sell its consumer finance operations in Japan to Shinsei Bank for $5.4 billion in July 2008 and exit consumer finance in Japan altogether.[38]

Sensitivity to U.S. dollar
GE does the majority of its business outside of the U.S., earning its revenue in a variety of different currencies. As a U.S.-based company, however, GE's revenue is reported in U.S. dollars. Fluctuations in the dollar's exchange rates can substantially increase or decrease GE's revenues (as reported in USD). In general, a weakening of the US dollar is beneficial for GE's international operations. As the value of the dollar falls, any given amount of foreign currency converts to a larger number of USD (in nominal terms). Since its revenues are counted in USD, this can boost GE's revenues. If the dollar's value increases, however, income in other currencies yields fewer USD, which can negatively impact GE's revenues.

Sensitivity to the 2008 Financial Crisis
GE is one of the largest issuers of commercial paper - short term financing in the money markets - with $88 billion outstanding as of October 2008. [8] On March 12, 2009, S&P downgraded GE to a "AA+" credit rating from its long-held "AAA" rating, citing increased uncertainty relating to GE Capital.[10] Morningstar analysts predict that GE will have to put up an additional $15-$20 billion as additional collateral in the event its credit rating is downgraded. [39] However, GE is still one of the only financial services firms that holds a "AA+" rating and has a "stable" outlook from S&P. [10] Along with interbank lending, the commercial paper market has also seized up with the 2008 credit crunch. As a result, the company has shifted its funding strategy from commercial paper to outside deposits. [39]

In addition, GE generates roughly half of its profits from GE Capital, which invests in a wide variety of assets including real estate, credit cards, and mortgages. GE itself anticipates commercial real estate losses at GECS in 2010 will rise to $2.9 billion, up from $2.1 billion in 2009, as commercial real estate values potentially fall another 14% from December 2009.[40] Overall losses at GECS are expected to peak in 2010 at $13.6 billion.[40]

In a very public show of confidence, the famed investor Warren Buffet invested $3 billion in GE stock in October 2008. [41] The following week, GE sold $12 billion in shares to the public to shore up capital. [8] Unfortunately, GE per share earnings have been impacted by the financial crisis as they dropped from $2.20 per share in 2007 to $1.12 per share in 2009.[42] GE was also forced to cut its dividend by 68%, from $0.31 to $0.10 per share.[43]

Growth through Acquisition and Sales of Underperforming Units
In May 2008, GE announced plans to seek a buyer for its large appliances division, which makes such things as washing machines and refrigerators.[44] By summer 2008 GE revised its plans to instead spin-off the appliances division, valued at $4 to $8 billion,[45] to shareholders as a independent company. This unit accounted for 4.2% ($7.2 billion) of GE's 2007 revenue.[45] This is part of an ongoing process under CEO Immelt to sell off product lines with limited growth potential, which so far has included the sale of GE's private label credit card and the company's consumer finance unit in Japan, and refocus on areas of potentially higher growth, such as water treatment or aviation. [46] In December 2008 GE Money sold its Wizard Home Loans brands along with $4 billion in mortgage debt to Aussie Home Loans in an effort to withdraw from the residential mortgage business and limit the company's exposure to the housing crisis. [3]

Environmental Leadership
In May 2005 GE announced the launch of a "Ecomagination" program intended to develop tomorrow’s solutions such as solar energy, hybrid locomotives, fuel cells, lower-emission aircraft engines, lighter and stronger durable materials, efficient lighting, and water purification technology.[47] On December 28, 2008, new GE Energy Smart CFL lightbulbs, 15-watt energy-saving bulbs that look and function exactly like their 60-watt incandescent counterparts, will debut in Target stores.[48] The bulbs are rated 8000 hours and guaranteed for five years. Between April and June 2009, GE plans to introduce 9-watt and 20-watt incandescent-shaped equivalents of 40-watt and 70-watt bulbs, respectively.[48] The company's increased emphasis on clean technology is an aggressive initiative to bring new technologies help consumers meet pressing environmental challenges. [48]

Competition



GE vs. Siemens, 2004-2006
GE competes against a number of other companies, but most of them are more specialized, focusing in one industry. GE's operations, on the other hand, are spread across many different industries, limiting its exposure to competition from any one company.

Of GE' competitors, Siemens AG (SI) is the most significant. Siemens operates in a number of different industries, many of which it shares with GE. In fact, NBC Universal is the only of GE's six divisions that Siemens does not directly compete with. Despite GE's size advantage, however, Siemens is still a very large company in its own right, and it's the only company that effectively competes against GE in nearly all of its main industries.

2009 GE vs. Siemens income data Revenue (mm) Net Income (mm) Profit Margin 5 Yr. Avg. Profit Margin Revenue per employee Net income per employee
GE [49][50] $156,783 $11,025 7.29% 11.17% $522,610 $38,113
Siemens [51] [52] €76,651 €2,292 3.66% 3.92% $244,662 $8,958
Industry average[52] - - 1.34% 4.22% - -
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