Summary
- General Electric Co. in the 1990s made a name for itself by bringing financial engineering to the corporate world and expanding its use in ways never before imagined.
- The "new" Modern Corporation uses financial engineering as one of its primary tools, yet its use of financial engineering is to make productive the massive piles of cash it generates.
- The earlier advancements occurred within a very opaque atmosphere where funds were moved around to generate the outcomes management called for, something now haunting these management teams.
- The later use of financial engineering has been much more transparent and the investment community needs to respect the difference between the two when analyzing companies.
The recent events surrounding the accusations by Harry Markopolos concerning the possibilities of accounting fraud at General Electric Co. (NYSE:GE) bring out another issue captured in several of the comments to my recent article.
These concerns also point, I believe, to some differences between the conglomerate form of corporate organization of the past and the “new” Modern Corporation currently ushering in the future.
Both forms of economic structure place a great deal of emphasis upon financial engineering, but the need for financial engineering in the two different organizational forms come about for different reasons.
These reasons are very important and need to be examined in each company under review so as to understand the benefits … and costs … that are present.
In terms of the “legacy” picture of General Electric, I have presented this in an earlier post.
The conglomerate form of corporate structure represented an attempt to put together a portfolio of corporations, most having few, if any, synergies with others in the portfolio. Yet, extra value is sought in putting all the companies together under one umbrella.
