Banking & Capital Markets

GE Banks for Itself

Company provides funding to complete purchase of one of its own units. Plus: adventure capital, and the mad rush to expense stock options.
Tim Reason and Joseph McCaffertySeptember 30, 2002

What do you do if you have a deal to sell a division but the buyer is unable to borrow the money to pay for it?

Lend them the money yourself. At least, that’s what General Electric Co. is doing.

The conglomerate’s management agreed to lend $235 million to buyout specialist Francisco Partners LP to help that firm finance its $800 million purchase of Global eXchange Services. The reason for GE’s seeming largesse? The bond markets “were not good in June when we announced the agreement, and they’ve gotten worse since then,” GE spokesman David Frail told Bloomberg.

The option to provide financing was in the original agreement, Frail noted.

GE will record a profit of $300 million from the sale of the Web-based business-to-business marketplace, said Bloomberg. “By doing this GE gets to book a gain,” Glenn Reynolds, chief executive of research firm CreditSights Inc., told the wire service. “This is GE Capital being the highly accomplished lender using the balance sheet to do what they do best.”

Initially, investment bank Credit Suisse First Boston had agreed to provide Francisco Partners $445 million in loans to fund the deal, and planned to replace $235 million of that with high-yield bonds.

But last week GE Commercial Finance decided to buy the $235 million of bonds, freeing CSFB of its commitment, for the purpose of “expediting the closing” of the sale, according to a Moody’s Investors Service press release last week. GE will also own 10 percent of the unit once it is sold, reported Bloomberg.

Adventure Capital

There are not a lot of venture capitalists looking to flood Internet start-ups with cash these days, but that doesn’t mean the well is completely dry. In fact, after a long drought, a few deals are getting done.

In July, FurnitureFind Corp., which runs the site FurnitureFind.com, secured a seven-figure round of financing from HQ Venture Capital, based in Austin, Tex. “The smart VC money realizes that the cycle has been down for so long that the [Internet] companies that have survived must be doing something right,” says Stephen Antisdel, CEO of FurnitureFind. But, he says, getting the infusion wasn’t easy. HQ conducted four months of due diligence before committing the funds.

Other recent deals include Servicebench.com Inc., a maker of Internet-based software, which raised $1.25 million; and Nextone Communications Inc., which raised $3.5 million from Core Capital Partners and other investors.

Erik Brown, president of CGI Capital Inc., in Mundelein, Ill., says that VC firms are starting to put a toe back in the water. “There is so much money out there that has been on the sidelines for the last two and a half years,” he says.

Stock Options: Is Everybody Doin’ It?

For years, only two companies on the S&P 500 recorded their option grants as expenses: The Boeing Co., since 1998, and Winn-Dixie Stores Inc., since 1990. But in recent weeks, a stampede of companies has joined them.

“We saw this as one way to demonstrate that we are an open-book kind of company with good governance,” says Michael Coke, CFO of real estate investment trust AMB Property Corp., which announced its plan to expense options on July 8. He says the decision will ultimately reduce earnings per share by 2 to 3 percent. Six days later, the Coca Cola Co. shook up the finance world by announcing plans to do the same.

Since then, such firms as Bank One, American International Group, and The Washington Post have announced hat they, too, will expense their options. Even Amazon.com Inc. broke rank with options-heavy tech firms and announced that it will begin expensing options in the near future. (Microsoft and Intel recently reiterated their opposition to expensing options.)

But are these voluntary conversions simply a public-relations move by a select few, or are they the beginning of an inevitable trend? With the recent announcement that corporate leaders General Electric and General Motors will begin expensing options, the peer pressure many soon become to great to resist.

“I see it heading in that direction,” says Mark Slaven, CFO of Santa Clara Calif.-based 3Com Corp., who predicts that his company will likely have to expense options within the next two years.

Some companies, including 3Com, are concerned that the current company-by-company adoption could lead to inconsistency among valuations. The Gillette Co., for example, says it supports expensing, but is waiting for more guidance from standards-setters. “There must be one standardized, common approach,” says spokesman Eric A. Kraus. –T.R.

Optional Opinions

The debate over expensing is heating up.

Name,Title Stand Comments
1. Warren E. Buffett, CEO Berkshire Hathaway For His long campaign to expense options finally began paying off.
2. George W. Bush, President, U.S.A. Against Nothing about options in his “Corporate Responsibility” speech.
3. Bill Gates, Chairman, Microsoft Against In July the company said it had no plans to change accounting rules.
4. Alan Greenspan, Chairman, Federal Reserve For Says options are one of the “avenues to express greed.”
5. Robert Herz, Chairman, FASB For “Most of the objections come from the corporate community.”
6. Joseph Lieberman, U.S. Senator (D­Conn.) Against He fears expensing could deny options to the middle class.
7. Harvey Pitt, Chairman, SEC Against Says expensing options not an issue until other controls put in place.
8. Sanford I. Weill, CEO, Citigroup For & Against Expense them for the top five executives only.

Source: Company Data, News Reports

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