Will GE Jump For Joy?

Gulab Ram is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In May, General Electric (NYSE: GE) unit GE Mining announced its first two acquisitions, Fairchild International and Industrea Ltd., as part of a development program to expand to support roughly 35% of the underground mining value chain.

Virginia-based Fairchild primarily makes scoops, haulers, continuous miners, and maintenance vehicles; whereas Australian equipment maker Industrea makes various explosion-proof vehicles and towables such as carriers, dozers, and shearers.  

Newly appointed GE Mining CEO Geoff Knox asserted the company “[has] to be targeted in buying into spaces that leverage what we already do. We want to use our current knowledge and add it to the product line we’re acquiring and make it smarter and more appealing.” At the MINExpo conference last week in Las Vegas, GE announced its Durathon battery and Invertex AC drive systems have already been fitted to the vehicles it acquired from Fairchild.

William Blair & Co. recently cited Joy Global (NYSE: JOY) as the next possible acquisition target for GE Mining, while Oriel Securities mentioned Weir Group. Neither company is as narrowly focused on underground mining as GE's recent acquisitions.

Joy Global offers mining equipment geared toward both underground and surface miners, whereas Weir primarily makes pumps and valves used to remove slurry and other waste from underground mines, as well as pumps and valves for the oil and gas industry.

Weir could be a possible target if GE wants to bolster its offerings in both Oil & Gas and Mining, but Joy Global derives almost half of its revenue from Surface Mining, an area in which Caterpillar (NYSE: CAT) dominates and GE has made no declaration of interest.

GE Transportation CEO Lorenzo Simonelli predicts GE Mining will realize $5 billion in revenue by 2016 through "measured acquisitions" over time rather than "all at once," echoing CEO Jeff Immelt's preference toward smaller acquisitions of more focused companies in the $1 billion to $3 billion range.

GE Mining already sees revenues of $2 billion, so even if current revenue sources stagnate, that leaves only $3 billion worth of revenues yet to be filled via acquisitions. This is another strike against Joy Global, which has TTM revenues of $5.4 billion, and Weir, which reported $3.7 billion in revenues at the end of 2011, as they are both too large to merit consideration.

If, however, GE were to buy Joy Global for its Underground Mining Machinery business, which coincidentally accounts for roughly $3 billion in revenues, and sell the Surface Mining division to Caterpillar, synergies could result for both industrial titans without putting the two firms in direct competition. GE could augment its underground mining equipment value chain as Caterpillar furthers its dominance in surface mining machinery.

For instance, Cat's Mining segment is a large player in the market for hydraulic mining shovels, used mostly in smaller surface mines and for harder ores, whereas Joy's Surface Mining division is the largest player in the market for electric mining shovels, which are used in larger, deeper surface mines. Caterpillar could enjoy greater exposure to different surface mines by purchasing the part of Joy that GE doesn't need.

Caterpillar has experience integrating such large-scale acquisitions. Last July, Cat completed the acquisition of Bucyrus for $8.8 billion, and simply inserted its own engines and components into rebranded Bucyrus products. Doing so helped Caterpillar reap benefits including lower product costs for the company and lower operating costs for its customers. Will GE jump for Joy? Maybe so, if the Cat pounces too.

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